Investors' Preferences on Taiwan's Mutual Funds-Fund's Market Share vs. Fund Flow

This paper explores the role of fund's market share as opposed to fund flow in representing investors' preferences for Taiwan's mutual funds. Our results show that investors respond positively to fund's performance if fund's market share is used to indicate investors' relative preferences on funds. Furthermore, we evidence that fund's market share is predictive to fund's future performance in that a fund will have better performance if its previous month's market share is relatively higher. However, we do not find such similar pattern for fund flow. Thus, this finding is similar in spirit to the "smart money effect" found by Zheng (1999), although the investors' "smart money effect" is indicated by fund's market share, instead of fund flow. Finally, we find that fund investors' market timing ability can be observed by investors' preferences for funds in terms of the fund's market share, but not in terms of fund flow.