Family Values and the Star Phenomenon
Vikram Nanda, University of Michigan
Z. Jay Wang, University of Michigan
Lu Zheng, University of Michigan

Most mutual funds belong to fund families, yet little is known of the influence of family membership on fund strategy and performance. We examine the extent to which a fund’s cash in flows are affected by the performance of other funds in the family — and the consequences of such spillover effects. The cash flow response to fund performance has been documented to be asymmetric, suggesting that even stand-alone funds may seek to create ‘stars’ to attract large cash in flows. We argue that for a family with positive spillover effects between funds, the impact of a star performer is amplified. This can increase the incentives to both pursue star-driven strategies and to increase the size of the family. Our empirical results indicate a strong positive spillover effect from star fund performers, resulting in higher cash in flow for other funds in the family as well. We show that the probability of obtaining a star performance is increasing in family size and in the negative correlation of fund returns. However, factors that increase the odds of producing a star fund and, potentially, attracting more cash in flow to a fund family — are also found to be factors associated with a lower average performance. Hence, a star-based marketing strategy, presumably aimed at less informed investors, does them no favor. (Accepted Spring 2002.)