Investors Do Respond to Poor Mutual Fund Performance: Evidence from Inflows and Outflows

Abstract

We examine the relation between mutual fund performance and gross flows for a large sample of actively managed U.S. mutual funds. Unlike previous studies that have only examined periods of generally increasing net flows, our sample includes periods of both increasing and decreasing net flows. We find that outflows are related to performance, with investors withdrawing money from poor performers. We also find that outflows and inflows respond

Running From a Bear: How Poor Stock Market Performance Affects the Determinants of Mutual Fund Flows

“…In other words, when only accounting for net flows, the punishment provided to the worst performers is not in sync with the reward given to the best performers. However, once I separate purchases and redemptions, my results based on the purchases of winners and the redemptions of losers are consistent with O'Neal (2004), Ivković and Weisbenner (2007) and Cashman et al (2006). Specifically, when I control for raw performance, I find no evidence that funds in the bottom decile see fewer redemptions.…”

“…Consistent with prior aggregate fund flow research, he finds that past winners see increased purchases; however, unlike previous studies, he reports that poor performers are, in fact, punished with increased redemptions. Subsequently, Ivković and Weisbenner (2007) and Cashman et al (2006), who focus on the determinants of fund flows, also separate purchases and redemptions to show increased purchases to past winners coupled with increased redemptions from poor performing funds – albeit for different reasons. Specifically, Ivković and Weisbenner find that while inflows are driven by purchases that chase relative performance, outflows are driven by absolute performance.…”

“…One explanation for the difference in the determinants of redemptions between the studies by Ivković and Weisbenner (2007) and Cashman et al (2006) is the use of different sample periods. Ivković and Weisbenner's data come from a sample of funds held at a no‐load brokerage firm from 1991 to 1996, and Cashman et al's data are taken from Securities and Exchange Commission filings between 1997 and 2003.…”

Investor Flows to Asset Managers: Causes and Consequences

“…However, Cashman et al (2012) extend the full sample of US domestic equity funds to 2007, and find significant sensitivity of monthly redemptions to bad performance, enough that monthly net flows show no convexity . Spiegel & Zhang (2013) are also skeptical of convexity and argue that it is an artifact of heterogeneity between funds that individually face linear flows.…”

Mutual fund performance: A synthesis of taxonomic and methodological issues

“…As interest in studying the flows from investors and their deployment by fund managers grew, some scholars obtained data on 'gross' flows at the fund level rather than infer them from changes in net asset value. Cashman, Deli, Nardari, & Villupuram (2008) identify both inflows and outflows at the fund level and conclude that current investors punish poor performance by increasing (decreasing) their outflows (inflows). Ivkovich and Weisbenner (2008) use mutual fund trading data and find that inflows are related to relative performance while outflows are related to absolute performance.…”