Investing in Tough times What Investors' Behavior across the Business Cycle Tells about the Mutual Fund Market

In academic literature mutual fund investment has been traditionally studied from the perspective of an optimal portfolio allocation problem. An increasing body of empirical and experimental evidence has suggested that the investors’ behavior share remarkable similarities with the behavior of buyers in consumer goods markets. In this study develop and test a number of hypotheses based on empirical evidence in marketing literature. Using data on US mutual funds from 1991 to 2011 I show that investors price awareness (sensitivity of investment flows to expense ratios) increases as the macroeconomic environment worsens. I also show that this effect is due to expectations of future economic hardship rather than to the current situation. These results are robust to alternative explanations based on time-varying risk aversion, informativeness of past performances and competition from low-cost passive funds. Finally, using a new dataset of advertising expenditures I show that advertising becomes more effective in tough times, also due to the fact that, contrary to common beliefs, high advertising budgets are paid through increased volumes rather than higher expense ratios.