Is M Oney Smart? a Study of M Utual F Und Investors' F Und Selection Ability Ful to Mark Carhart, Eugene Fama and Kenneth French for Providing the Mutual Fund Data. I Thank

Gruber (1996) finds evidence to support selection ability among active fund investors for equity funds listed in 1982. Using a large sample of equity funds, I find evidence that newly invested money is able to predict future fund performance, in that the equally weighted portfolios of funds that receive more money subsequently perform significantly better than those that lose money. There is no significant evidence that funds that receive more money subsequently beat the market, except for the small funds. There is some evidence that the cash flow information of the small funds can be used for profitable trading strategies. H a vin g e xp e r ie n c e d d r a m a t ic g r o wt h in t h e p a s t t wo d e c a d e s , t h e m u t u a l fu n d in d u s t r y p la ys a n im p o r t a n t r o le in t h e U .S . e c o n o m y. A s a m a jo r in ve s t m e n t ve h ic le , o p e n -e n d e qu it y a n d b o n d m u t u a l fu n d s m a n a g e d a b o u t $ 3 .3 t r illio n a s s e t s , a s u m m o r e t h a n a ll b a n k s a vin g s d e p o s it s , a t t h e e n d o f t h e ̄ r s t qu a r t e r o f 1 9 9 8 . D u e t o t h e g r e a t n u m b e r o f fu n d s in e xis t e n c e , e va lu a t in g m a n a g e r s ' p e r fo r m a n c e a n d s e le c t in g fu n d s wit h r e la t ive ly h ig h r is k-a d ju s t e d r e t u r n s c a n b e a n e s p e c ia lly d i± c u lt a n d c h a lle n g in g t a s k. Th e g r o wt h o f d a t a c o m p a n ie s like L ip p e r , Mo r n in g s t a r a n d Mic r o p a l a n d t h e e xp lo s io n in t h e p u b lic a t io n o f b o o ks a n d a r t ic le s o n m u t u a l fu n d s a ll r e ° e c t in ve s t o r s ' t r e m e n d o u s d e m a n d fo r d e t a ile d m u t u a l fu n d in fo r m a t io n a n d in ve s t m e n t a d vic e . Th is h u g e d e m a n d s u g g e s t s t h a t m a n y in ve s t o r s a r e m a kin g m u t u a l fu n d in ve s t m e n t d e c is io n s t h e m s e lve s a n d m a n y o f t h e m s t u d y c u r r e n t a n d h is t o r ic a l in fo r m a t io n a b o u t t h e fu n d s c a r e fu lly in t h e d e c is io n m a kin g p r o c e s s . W it h a ll t h e e ®o r t s p e n t in s e le c t in g a n d e va lu a t in g m u t u a l fu n d s , t h e r e is o n e n a t u r a l qu e s t io n t o a s k: " Ca n in ve s t o r s fo r e c a s t m u t u a l fu n d p e r fo r m a n c e ?" Th is s t u d y in ve s t ig a t e s wh e t h e r in ve s t o r s ' p u r c h a s in g a n d s e llin g d e c is io n s a r e a b le t o p r e d ic t fu n d s ' fu t u r e p e r fo r m a n c e , a n d wh e t h e r in ve s t o r s a r e s m a r t in s e le c t in g fu n d s . A n u m b e r o f r e c e n t p a p e r s s t u d y t h e in ve s t m e n t p e r fo r m a n c e o f m u t u a l fu n d m a n a g e r s , ye t o n ly Gr u b e r ( 1 9 9 6 ) s t u d ie s t h e a b ilit y o f in ve s t o r s t o s e le c t fu n d s . B e g in n in g wit h Je n s e n ( 1 9 6 8 ) , m a n y r e s e a r c h e r s h a ve e xa m in e d t h e p e r fo r m a n c e o f d i®e r e n t g r o u p s o f m u t u a l fu n d m a n a g e r s u s in g va r io u s m e t h o d s . Mo s t ̄ n d t h a t m a n a g e r s o n a ve r a g e u n d e r p e r fo r m t h e m a r ke t wh ile o t h e r s ̄ n d t h a t m a n a g e r s d is p la y s o m e m a n a g e m e n t s kill. B r o wn a n d Go e t z m a n n ( 1 9 9 5 ) a n d Ca r h a r t ( 1 9 9 5 ) ̄ n d t h a t a va lu e -we ig h t e d in d e x o f e qu it y fu n d s h a s a s m a ll p o s it ive r is k-a d ju s t e d r e t u r n t h a t is s lig h t ly h ig h e r t h a n t h a t o f a n e qu a lly-we ig h t e d in d e x. Th is m a y b e in t e r p r e t e d a s e vid e n c e t h a t t h e a ve r a g e d o lla r in ve s t e d in U .S . e qu it y fu n d s b e a t s t h e a ve r a g e m u t u a l fu n d a n d t h e b e n c h m a r k. D o m u t u a l fu n d in ve s t o r s d is p la y s e le c t io n a b ilit y? In o t h e r wo r d s , d o r e vis io n s in t h e a g g r e g a t e m u t u a l fu n d p o r t fo lio fo r e c a s t fu t u r e r e t u r n s ? Gr u b e r ( 1 9 9 6 ) in ve s t ig a t e s t h is is s u e b y e xa m in in g t h e r is k-a d ju s t e d r e t u r n s o f n e wly in ve s t e d m o n e y in a c t ive ly m a n a g e d m u t u a l fu n d s . H e r e p o r t s m o n t h ly c a s h ° o w we ig h t e d a lp h a s fo r 2 2 7 fu n d s o ve r t h e p e r io d o f Ja n u a r y 1 9 8 5 t o D e c e m b e r 1 9 9 4 . In s h o r t , h e ̄ n d s e vid e n c e t h a t t h e r e t u r n o n n e w c a s h ° o ws is h ig h e r t h a n t h e a ve r a g e r e t u r n fo r a ll in ve s t o r s in t h e s e fu n d s . In t h e p r e s e n t p a p e r , I e xa m in e t h e s t a t is t ic a l a n d e c o n o m ic s ig n ī c a n c e o f t wo e ®e c t s o n a la r g e m u t u a l fu n d d a t a b a s e , ( 1 ) Gr u b e r 's " s m a r t m o n e y"