Selection effects in the births of mutual funds

Abstract Newborn funds disproportionately hold popular stocks, representing long‐lived strategic choices. This suggests that when choosing strategies in which to launch new funds, families do not consider only expectations for their own performance but also consider investor sentiment toward those strategies. The two motives for entry result in an interaction effect between competitive entry and strategy popularity, which affects performance and flows for both existing and newborn funds. Newborn funds' expectations for performance are partly driven by fund manager skill in those strategies, but this is not the only factor, leaving a role for time‐varying investment opportunities.