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Working Paper

Publication Date



Institutional funds – delegated portfolios catering to plan sponsors such as pensions and nonprofit organizations – have unique features and accordingly exhibit distinctive flowperformance patterns relative to mutual funds. Institutional fund flows are sensitive to longterm performance and to various performance measures explicitly taking risks into account. Plan sponsors flee from poorly performing funds as much as they flock to well-performing funds, but are less sensitive to the middle range of performance. Investor sophistication, agency problems, search costs, and lack of liquidity sharing across investment accounts help explain various flow response patterns. Finally, while plan sponsors may have diligently monitored past performance, they are not successful in picking funds that can outperform subsequently, as fund flows are negatively correlated with subsequent performance at short, intermediate, and long horizons.



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