SAFE Working Paper No. 380

Mutual Fund Shareholder Letters: Flows, Performance, and Managerial Behavior

Fund companies regularly send shareholder letters to their investors. We use textual

analysis to investigate whether these letters’ writing style influences fund flows

and whether it predicts performance and investment styles. Fund investors react to

the tone and content of shareholder letters: A less negative tone leads to higher netflows.

Thus, fund companies can use shareholder letters as a tactical instrument to

influence flows. However, at the same time, a dishonest communication that is not

consistent with the fund’s actual performance decreases flows. A positive writing style

predicts higher idiosyncratic risk as well as more style bets, while there is no consistent

predictive power for future performance.