We develop a simple rational model of active portfolio management that provides a natural benchmark against which to evaluate observed relationship between returns and fund flows. We show that many effects widely regarded as anomalous are consistent with this simple explanation. In the model,...

Using the dollar-value a mutual fund manager adds as the measure of skill, we find that not only does skill exist (the average mutual fund manager adds about $2 million per year), but this skill is persistent, as far out as 10 years. We further document that investors recognize this skill and...

We propose a new method of testing asset pricing models that relies on using quantities rather than prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate...

We establish an important role for the firm by studying capital reallocation decisions of mutual fund firms. At least 30% of the value mutual fund managers add can be attributed to the firm's role in efficiently allocating capital amongst its mutual fund managers. We find no evidence of a...