Fund flow bias in market timing skill. Evidence of the clientele effect

This paper investigates whether profit-seeking and values-driven investor decisions have an impact on the timing ability of socially responsible mutual fund managers. Surprisingly, we find evidence of successful market timing skill for positively screened mutual fund managers who fulfill the objectives of profit-seeking investors, demonstrating the importance of controlling for the clientele effect. This result may indicate a successful, forward-looking management style in this type of fund. Furthermore, we present certain evidence of the “smart money” phenomenon among profit-seeking investors who pursue the persistent component of returns and thus cause a downward bias in market timing skill.