FThe traditional view in the flow-performance literature is that the sensitivity of fund flows to past performance is the result of investors assuming that past performance will persist into the future. This is likely true of retail mutual fund investors, but institutional investors are arguably more sophisticated and better advised. Using survey data for 1999-2011 we analyze the views of institutional investors on their asset managers. These views include judgments about asset managers' past and future performance, as well as about non-performance factors including the business processes of their asset managers, the quality of their personnel and their service delivery. We explore how performance and non-performance factors relate to the flow of funds into the same asset managers. We find that, although expected performance is driven largely by perceived past performance (consistent with the prevailing view of the early flow-performance literature), the two measures are in fact distinct. However, it is perceived past performance, not expected future performance, which drives flows: once we allow for perceived past performance, the effect of expected performance on flows is insignificant. This suggests that institutional investors are ignoring their own expectations when making asset allocation decisions, and points to an agency problem, whereby these investors base decisions on the most tangible and defensible variable at their disposal – probably because they infer in their superiors, or in others who judge their actions, a belief that past performance is indeed a reliable guide to future performance.
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