This study explores how Chinese mutual fund managers’ degrees of disagreement (DOD) on stock market returns affect investor capital allocation decisions using a novel text-based measure of expectations in fund disclosures. In the time series, the DOD negatively predicts market returns. Cross-sectional results show that investors correctly perceive the DOD as an overpricing signal and discount fund performance accordingly. Flow-performance sensitivity (FPS) is diminished during high dispersion periods. The effect is stronger for outperforming funds and funds with substantial investments in bubble and high-beta stocks, but weaker for skilled funds. We also discuss the financial sophistication of investors and provide evidence that our results are not contingent upon such sophistication.

This study examines the effect of fund managers' bubble-crash experience on their investment styles. Using the 2007–2008 and 2014–2015 bubble-crash events of China's A-share market, we find that managers who experienced a stock market crash are more value-oriented in their portfolios. While the effect of firsthand bubble-crash experience on investment style is significant, we find little evidence of the impact of secondhand experience gained from institutional memory or the management team. We explain these findings using incomplete information learning theory, salience theory, and the change in risk preferences. Moreover, different investment styles across manager types affect fund performance around the time the new bubble burst in June 2015. Managers with 2007–2008 bubble-crash experience and a more value-oriented investment style have lower (higher) fund returns than those without such experience before (after) the bubble burst.