Measuring Innovation and Product Differentiation: Evidence from Mutual Funds

Abstract

"We study innovation and product differentiation using a uniquenessmeasure based on textual analysis of prospectuses.We find that small and start-up families have higher start rates than larger families, and their products aremore unique. Unique strategies attract more inflows in the first three years, and investors respond more to textbased uniqueness than other measures such as holdings or returns uniqueness. For established funds, word uniqueness has weak negative power for explaining returns, so investors in competitive equilibrium do not sacrifice much performance to get specialized products. Uniqueness attenuates the flow-performance relation, reducing the risk of investor outflows."