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The Portfolio Allocation Effects of Investor Sentiment about the Ability of Managers to Beat the Market, by Sean Masaki Flynn (October 2005)

I present a model that can transform discounts on closed-end mutual funds into a measure of investor sentiment about the ability of fund managers to beat the market. This measure of sentiment varies positively with capital flows into actively managed open-end mutual funds, but negatively with capital flows into passively managed index funds. Investors appear to re-allocate their portfolios between actively and passively managed investment vehicles based on expectations about by how much managers will beat or trail the market.

Working Paper (430 K, PDF)