Confidence in Fund Manager Skills and Mutual Fund Flows

We find that mutual fund investors care about the uncertainty associated with the fund's skills, which is neglected by the existing literature. We propose a measure named Confidence in the Fund's Skills (CFS) to investigate this question empirically. CFS has a significantly positive impact on fund flows comparable with the fund alpha. CFS helps to reduce the uncertainty associated with fund performance evaluation, making investors care more about CFS during recessions and periods with high volatility and economic policy uncertainty. Moreover, CFS has an asymmetric impact on flow-performance sensitivity, thus helping explain the flow-performance convexity puzzle. The findings cannot be explained by ambiguity aversion, Morningstar ratings, and behavioral biases