Gruber [Gruber, M., 1996. Another puzzle: the growth in actively managed mutual funds. Journal of Finance 51, 783–810] and Zheng [Zheng, L., 1999. Is money smart? A study of mutual fund investors’ fund selection ability. Journal of Finance 54, 901–933] document that managed fund investors demonstrate fund selection ability as they invest in funds whose subsequent performance is greater than that of funds from which they divest. This phenomenon has been since been termed the ‘smart money effect’. In contrast, Sapp and Tiwari [Sapp, T., Tiwari, A., 2004. Does stock return momentum explain the ‘smart money’ effect? Journal of Finance 59, 2605–2622] find that after controlling for stock return momentum, there is no evidence of a smart money effect. In this paper, we investigate whether a smart money effect exists in the Australian managed funds industry. The key findings of our paper are that there is a smart money effect in Australia and that stock return momentum does not explain this effect. We also find that the effect is not conditional on fund size. Our cross-sectional analysis indicates that investors are chasing funds that have performed well in the past and that cash flows to funds are persistent. However, we do not find any evidence that investors are pursuing funds that employ momentum trading strategies.