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THE JOURNAL OF FINANCE • VOL. LXXI, NO. 1 • FEBRUARY 2016Mutual Fund Flows and Cross-Fund Learningwithin FamiliesDAVID P. BROWN and YOUCHANG WU ∗ABSTRACTWe develop a model of performance evaluation and fund f l ows for mutual funds ina family. Family performance has two effects on a member fund’s estimated skilland inf l ows: a positive common-skill effect, and a negative correlated-noise effect.The overall spillover can be either positive or negative, depending on the weight ofcommon skill and correlation of noise in returns. Its absolute value increases withfamilysize,anddeclinesovertime.Thesensitivityoff l owstoafund’sownperformanceis affected accordingly. Empirical estimates of fund f l ow sensitivities show patternsconsistent with rational cross-fund learning within families.W ITH A TOTAL OF $26.8 TRILLION assets under management worldwide, mutualfunds are a major player in f i nancial markets, and a primary investment ve-hicle for households in many countries. In the United States, the $13.0 billionmutual fund industry attracts 44.4% of households, among which 68% holdmore than half of their f i nancial assets in mutual funds. 1 As such, mutualfund investments have a signif i cant impact on the wealth of a large fraction ofthe population. They also indirectly affect the eff i ciencies of stock, bond, andmoney markets, by determining the allocation of assets across fund managersparticipating in those markets. Not surprisingly, there is strong interest inunderstanding investment decisions of mutual fund investors, whether theyare sophisticated, and whether they act rationally. Empirical studies in this∗ Brown is at the Wisconsin School of Business, University of Wisconsin–Madison. Wu is at theWisconsin School of Business University of Wisconsin–Madison and Lundquist College of Busi-ness, University of Oregan. Previous versions of this paper circulated under the title “MutualFund Families and Performance Evaluation.” We thank Kenneth Singleton (Editor) and anony-mous referees for many thoughtful comments and suggestions, and thank Jonathan Berk, MichaelBrennan, Pierre Collin-Dufresne, Thomas Dangl, Zhiguo He, Bryan Lim,ˇLuboˇ s Pástor, MatthewSpiegel, Neal Stoughton, Luke Taylor, Hong Yan, Tong Yao, Josef Zechner, and seminar partici-pants at the Utah Winter Finance Conference in 2012, American Finance Association meetings in2012, Western Finance Association meetings in 2011, Financial Intermediation Research Societymeetings in 2011, China International Conference in Finance in 2011, University of Wisconsin–Madison, University of Illinois at Urbana-Champaign, University of Illinois at Chicago, Universityof Technology Sydney, and Vienna Graduate School of Finance for helpful discussions. The authorsdeclare that they have no potential conf l icts of intrest, as identif i ed in the Journal of FinanceDisclosure Policy, and have received no f i nancial support in the research or writing of the paper.1 These are statistics for the end of 2012, reported in the 2013 Investment Company Fact Bookof the Investment Company Institute (ICI).DOI: 10.1111/jof i .12263383