From Words to Portfolios Disentangling Narrative and Reality in Mutual Fund Differentiation
Abstract
This paper studies the difference between portfolio differentiation and narrative differentiation in mutual funds. Developing a transformer-based portfolio embedding model and combining it with pre-trained large language model embeddings of fund prospectuses, I construct two novel measures of mutual fund differentiation from portfolio holdings and prospectus narratives. The two measures are only weakly correlated, indicating that portfolio distinctiveness does not necessarily coincide with narrative distinctiveness. Prospectus uniqueness is associated with higher fees and, when past performance is strong, greater inflows, while portfolio uniqueness predicts future alpha only among funds with a strong track record. Together, these findings suggest that narrative differentiation in fund disclosures serves a marketing and pricing role, whereas portfolio differentiation is informative about future performance primarily among funds with strong prior records.
