Smart Money and Small Funds

Abstract

This study extends the literature on the relationship between recent performance and the movement of managed funds' assets by investigating the effects of fund size and age. The results confirm a size effect, as well as an age effect. Tests distinguishing between the two favor a size rather than an age interpretation. The evidence that flows of small funds are more sensitive to recent performance than flows of large funds is consistent with Gruber's (1996) notion of sophisticated investors using information in past performance to identify superior funds. Zheng's (1998) evidence that the good performers tend to be small funds suggests that the smart money should be following small funds, as confirmed in this study. Support for the 'smart money size effect' is also provided here with evidence confirming that small funds tend to be superior performers. Copyright Blackwell Publishers Ltd 2002.

Does performance explain mutual fund flows in small markets? The case of Portugal

“…strongly significant), meaning that the youngest funds are preferred by capital inflows. These results are consistent with the existing literature: Jain and Wu (2000), Sawicki and Finn (2002), Sapp and Tiwari (2004), Huang et al (2007), Cashman et al (2007) and Goriaev et al (2008) report a negative size effect, and Sawicki and Finn (2002), Huang et al (2007) and Goriaev et al (2008) a negative age effect on capital flows.…”

“…It is known that the normalised capital flows benefit younger funds (Gruber 1996;Sawicki and Finn 2002;Huang et al 2007;Goriaev et al 2008). In order to understand by how much the effect attributed to SIZE t−1 is a reflection of the reputation of the fund or the (natural) mirror of the loss of market share of the oldest and larger funds, the age of each fund (AGE) is included amongst the explanatory variables.…”

Top Management Turnover: An Analysis of Active Australian Investment Managers

“…In addition, superior performing funds are shown to invest more significantly in marketing, and this has been shown to generate significantly higher fund flow (Sirri and Tufano (1998), Fant and O'Neal (2000)). Other studies document a 'smart money' effect (Gruber (1996), Zheng (1999), Sawicki (2000) and Sawicki and Finn (2002)), including a size effect that exists between large and small funds. Sawicki and Finn (2002) also document that small and young funds exhibit a stronger money-flow effect than larger and older funds.…”

“…Other studies document a 'smart money' effect (Gruber (1996), Zheng (1999), Sawicki (2000) and Sawicki and Finn (2002)), including a size effect that exists between large and small funds. Sawicki and Finn (2002) also document that small and young funds exhibit a stronger money-flow effect than larger and older funds. Khorana (1996Khorana ( , 2001) provides evidence and support for the theory that external control mechanisms can be used effectively in disciplining mutual fund managers.…”

“…Second, the study is also important given that mutual fund studies find evidence of differences in sophistication among investor groups (e.g. Gruber (1996), Capon et al (1996), Zheng (1999), and Sawicki and Finn (2002)). In relation to this issue, our study explores potential clientele differences by examining an institutional investor's role in contributing to top management turnover given their ability to influence fund flow activity.…”