The Portfolio Choice of Mutual Funds

Description

The seminal work by Berk and Green (2004) models the fund managers’ skill as a universal return on all capital. In real life, fund managers have different skills in investing different assets and even different types of stocks. To the authors’ knowledge, this project is the first to fill this gap in the literature and explicitly study the portfolio choice of mutual fund managers when investing in different assets. In our model, assets are heterogeneous because fund managers have different skills, the cost of investing in them is different, or they attract fund flows differently. After solving the model, we will calibrate it to match standard empirical facts on mutual funds. In the end, we will empirically test the model using mutual fund data. Notably, we plan to use the difference in the self-disclosed segment information as an empirical proxy to distinguish between well-known and opaque stocks. We will show that investing in different stocks will have a different impact on attracting fund flows. Thus, we can test the model’s implication using mutual funds’ portfolio choice.