INVESTOR REACTION TO MUTUAL FUND PERFORMANCE: EVIDENCE FROM UK DISTRIBUTION CHANNELS (Forthcoming Journal of Financial Research)

Investor reaction to mutual fund performance conditions the behavior of mutual fund managers and fund complexes and thus has widely reaching ramifications for the trading of assets worldwide. In particular, the mutual funds literature has long argued that convexity in the money flow-performance relation influences risk-taking by funds. Existing empirical studies, however, largely focus on the average US investor, obscuring the possibly disparate contributions of different clienteles. We analyze UK data on monthly fund sales and purchases made via seven distinct distribution channels. We show that there exist marked differences in the reaction to fund performance between different types of retail and institutional investors. These differences can be understood by considering the incentives of parties involved in each distribution channel. Our flowperformance analysis by channel indicates that the well-documented aggregate net flow-performance convexity in mutual funds is driven by the extreme reaction of retail inflows to favorable performance particularly from independently advised investors. JEL Codes: G11, G23