Too naïve to NAV? Performance display and capital misallocation

Abstract

We find that mutual fund flows respond to price returns (changes in net asset value per share or NAV returns) that are widely displayed in practice, whereas total fund returns include both price returns and fund distributions. NAV return-chasing is not driven by tax considerations or alternative performance and risk metrics and leads to suboptimal investment performance. Additionally, NAV return-chasing generates price pressure on funds’ stock holdings. These findings suggest that more prevalent displays of total investment returns could improve investor decision-making, especially for less sophisticated investors.