Based on the distribution of equity fund returns, we show the importance of the return discrimination between funds in the flow-performance relationship. To capture the difference in returns, we employ raw objective-adjusted returns rather than relative returns (i.e., performance ranks). The net flow-performance relationship comes from the convex inflowand outflow-performance relationships. In this case, fund size and age have no significant effect on these relationships. When we employ 12-month objective-adjusted returns to measure past performance, we can obtain a linear net flow-performance relationship after controlling for the investor-substitution effect.

JEL classification: G10, G11

Keywords: Mis-scaled performance, Return discrimination, Flow-performance relationship, Inflows and outflows, Investor-substitution effect