We examine the extent to which a fund's cash flows are affected by the stellar performance of other funds in its family -- and consequences of such spillovers. We show that star performance results in greater cash inflow to the fund and to other funds in its family. Moreover, families with higher variation in investment strategies across funds are shown to be more likely to generate star performance. We argue that spillovers may induce lower ability families to pursue star-creating strategies. Consistent with our conjecture, families with high variation in investment strategies across funds significantly underperform low-variation families. Copyright 2004, Oxford University Press.

We develop a model of the mutual fund industry in which the management fees and loads charged by actively managed open-end funds and average fund returns are determined endogenously in a competitive market setting. It is shown that heterogeneity in managerial skills at investing and minimizing costs, and the existence of investor clienteles with differing liquidity and marketing needs, gives rise to a variety of open-end fund structures that differ in the average return delivered to investors. Managers choose a fund's structure to maximize the rents they capture from their ability, taking into account the effect on investor flows. In equilibrium, funds that constrain liquidity withdrawals may have to charge lower fees and share some profits in the form of higher investor returns, when there is relative scarcity of investors with low liquidity needs.