“…20. For studies investigating the influence of mutual fund family on fund performance and flows, see, for example, Sirri and Tufano (1998), Huang et al (2007), Brown and Wu (2016), and Bessler et al (2016).…”
Purpose
The purpose of this paper is to investigate the dynamics of mutual fund investment flows across the business cycle. To account for the differences in the flow patterns of funds catered for institutional investors and those focusing on retail investors, the author conducts this investigation separately for flows of institutional and retail funds.
Design/methodology/approach
The author uses the sample of US equity mutual funds for the period between 1999 and 2012. For the samples of each type of fund, the author performs separate analyses for expansion and recession periods. Following Sirri and Tufano (1998), the author implements the Fama MacBeth (1973) approach.
Findings
The author finds that flow patterns of both fund types vary across the business cycle. For example, the results reveal that during bad times, institutional investors demonstrate weaker return-chasing behavior, while paying higher attention to Jensen’s α, than during good times. In addition, the author reports results on the effect of fund exposure to various systematic risk factors. For instance, the author observes that during economic downturns, investors of both fund types tend to punish managers with higher market exposure. During expansions, the fund’s market exposure positively affects flows of institutional funds, while its effect on the flows of retail funds remains negative.
Originality/value
To the best of the author’s knowledge, this is the first study that investigates mutual fund investment flow patterns across the business cycle, while simultaneously accounting for differences in flow patterns between retail and institutional funds. A further contribution of this paper is that it explores the previously overlooked relationships between fund flows and their exposure to various systematic risk factors.
“…20. For studies investigating the influence of mutual fund family on fund performance and flows, see, for example, Sirri and Tufano (1998), Huang et al (2007), Brown and Wu (2016), and Bessler et al (2016).…”
Purpose
The purpose of this paper is to investigate the dynamics of mutual fund investment flows across the business cycle. To account for the differences in the flow patterns of funds catered for institutional investors and those focusing on retail investors, the author conducts this investigation separately for flows of institutional and retail funds.
Design/methodology/approach
The author uses the sample of US equity mutual funds for the period between 1999 and 2012. For the samples of each type of fund, the author performs separate analyses for expansion and recession periods. Following Sirri and Tufano (1998), the author implements the Fama MacBeth (1973) approach.
Findings
The author finds that flow patterns of both fund types vary across the business cycle. For example, the results reveal that during bad times, institutional investors demonstrate weaker return-chasing behavior, while paying higher attention to Jensen’s α, than during good times. In addition, the author reports results on the effect of fund exposure to various systematic risk factors. For instance, the author observes that during economic downturns, investors of both fund types tend to punish managers with higher market exposure. During expansions, the fund’s market exposure positively affects flows of institutional funds, while its effect on the flows of retail funds remains negative.
Originality/value
To the best of the author’s knowledge, this is the first study that investigates mutual fund investment flow patterns across the business cycle, while simultaneously accounting for differences in flow patterns between retail and institutional funds. A further contribution of this paper is that it explores the previously overlooked relationships between fund flows and their exposure to various systematic risk factors.
“…But that said, performance fees in themselves are subject to a wide variety of principal-agent problems and must be managed accordingly. And in cases where it becomes clear that additional investment is reducing instead of increasing alpha, the asset manager could impose a "soft" closing of the fund in order to avoid additional inflows that would ultimately increase the fund size 24 and transaction costs in a value-reducing way. Managing this principal-agent conflict over the optimal size of a fund requires effective oversight and corporate governance and an independent and strict control of investment management, investment performance, and transaction costs.…”
“…Then we use the Carhart (1997) four-factor model 3 to calculate the mutual fund performance, as described in Equation (1). This model has been widely applied in the literature to assess portfolio management (Ammann et al, 2012;Bessler et al, 2016;Chen and Chen, 2017;Kacperczyk et al, 2014;Karoui and Meier, 2009).…”
Section: Performance Methodology and Datamentioning
The main aim of this study is to analyse the relationship between turnover and performance in institutional investment management. For a sample of US equity mutual funds during the period January 1999-December 2014, we show that high-turnover funds do not beat low-turnover funds, since their performances are no different, or even significantly lower. Moreover, we show that investing in past high-turnover mutual funds provides investors with significantly worse results than investing in previously low-turnover funds. Investors aiming to enhance their risk-adjusted returns should therefore consider the turnover ratio level in their fund investment decisions.
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