What do mutual fund investors really care about?

Rational investors should account for risk factor exposure when allocating capital to mutual funds. Two recent influential studies use mutual fund flows to test whether investors distinguish between performance driven by managers' skill and systematic risk factors. Both studies found that investors use the Capital Asset Pricing Model (CAPM), and one concluded that the CAPM is the "closest to the true asset pricing model." We re-examine these results and show that, in fact, fund flow data are most consistent with investors relying blindly on fund rankings (specifically, Morningstar ratings) and chasing recent returns. We find no evidence that investors account for any of the common systematic risk factors when allocating capital among mutual funds