Prior Performance and Closed-End Fund Discounts

In open-end funds, net inflows are positively correlated with past performance. This study investigates how past net asset value (NAV) returns affect the premium on closed-end funds traded in the United States and the United Kingdom. Past performance is significantly priced in stock funds, although NAV returns are persistent only for bond funds. In the United States, where realized capital gains are paid out as dividends, investors appear to interpret dividend flows as evidence of skill. There is substantial short-run inertia in fund prices, which tests indicate is explained to some extent by staleness of reported NAVs