What Should Investors Care About? Mutual Fund Ratings by Analyst vs Machine Learning Technique

We examine two forward-looking mutual fund ratings: the analyst rating produced by human analysts and the quantitative rating generated by a machine learning technique. The analyst rating identifies outperforming funds, while the quantitative rating does not—this difference derives mostly from the selection of analyst coverage. Moreover, the tone of the analyst report contains incremental soft information predicting fund performance. Finally, retail investors do not follow analyst recommendations; instead, they chase the quantitative rating. Our results highlight the importance of mutual fund analysts in information production and imply a capital misallocation problem in mutual fund investment.