Spot Fishes at the Table: Tracking Retail Investors and Mutual Funds Return

Abstract

We propose a new definition of mutual fund skill in tracking retail investors through characterizing trading synchronicity between mutual funds and retail flows. Firstly, we find robustness evidence that funds with low trading synchronicity significantly outperform funds with high trading synchronicity. Secondly, through a noisy rational expectations model with heterogeneous skills, we demonstrate the trading synchronicity captures mutual funds’ ability to explore noise retail flows, other than stock picking or market timing. These findings offer new evidence that some funds indeed track retail investors intentionally and that ability to explore retail flows could deliver excess return.