When Similarity Sells and Diversity Delivers: The Dual Preferences Driving Mutual Fund Flows

Sammanfattning

Which characteristics shape investor demand for ESG mutual funds? Beyond performance, fees, and adherence to conventional investment strategies, we examine whether investors reward funds that adhere to the ESG strategies described in their prospectuses. Using SEC prospectus text, CRSP mutual fund data, and portfolio holdings for actively managed U.S. equity mutual funds from 2016 to 2024, we classify funds by ESG language in their Principal Investment Strategy sections and measure portfolio adherence to both conventional strategy peer groups and ESG-strategy peer groups. We show that fund flows increase when funds remain close to the average holdings of their conventional strategy peers, but not when ESG funds remain close to the average holdings of their ESG peers. Using idiosyncratic industry return shocks as instruments, we find suggestive evidence that investors may even prefer ESG funds that differentiate themselves from their ESG peer-group consensus. Our results uncover dual investor preferences in mutual fund flows: similarity sells in conventional strategy space, while diversity delivers in ESG strategy space.