Temporal Changes in the Determinants of Mutual Fund Flows

Abstract

We examine how the relation between mutual fund performance and fund flows has changed over time by separating our sample into two periods (1978-87 and 1988-97). We document an increase in the flow-performance asymmetry in the second period that exacerbates the adverse incentive for fund managers to increase portfolio risk. We develop a measure ofthe elasticity offund flows with respect to performance, which filters out the confounding influence of greater aggregate fund flows in the second period and allows an examination of whether current investors place more emphasis on prior performance when selecting funds. We conclude that, though top performing funds are rewarded with greater fund flows in the second halfofour sample, the change is due solely to the increase in aggregate fund flows and not to an increased reliance on performance by individual fund investors.JEL classification: G1, G2, L1.

Determinants of equity pension plan flows

“…This finding may be due to investors of pension plans managed by insurance companies (1) treating all plans within an investment style as equally risky, as shown by Fant and O'Neal (2000) or (2) not knowing that they are taking a risk when they invest their wealth in a specific equity pension plan or (3) not having been informed about the risk and systematic risk of their pension plans or (4) suffer from familiarity bias as found by Brown et al (2012), tending to invest in pension plans that invest in sectors or stocks from Spain, without taking their risk into accountor (5) tending to prioritize return without taking the risk into account, since the Spanish pay-as-you-go social security system will provide them with a minimum retirement pension when they retire, causing a moral hazard behavior.…”

“…In this respect, most authors (for instance, Ippolito (1992), Sirri and Tufano (1998), Chevalier and Ellison (1997), Fant and O'Neal (2000), and Goriaev et al (2008)) coincide in stating that U.S. investors channel their savings into funds with better past performance, possibly in the hope of this performance being maintained in the future, considering the empirical evidence of persistence provided by Brown and Goetzmann (1995) and Goetzmann and Ibbotson (1994).…”

“…This relationship is maintained using different measures of performance (raw return and Jensen's Alpha) as shown by Sirri and Tufano (1998), Fant and O'Neal (2000) and Del Guercio and Tkac (2002), and its level of convexity is higher in smaller, younger mutual funds that demonstrate higher participation costs, according to Chevalier and Ellison (1997), Goriaev et al (2008) and Huang et al (2007). In these cases, fund managers could have incentives to take higher levels of risk in order to gain significant flow if they manage the fund well and to avoid significant losses if they perform poorly, which may have implications for the risk and return that participants experience, as shown by Chevalier and Ellison (1997) and Lynch and Musto (2003).…”

Investors’ distraction and strategic repricing decisions

“…12 To the best of my knowledge the issue of autocorrelation of flows first appeared in the works of Zeckhauser et al (1991) and Patel et al (1994). More recently the issue has been addressed by Fant and O'Neal (2000) and Cashman et al (2007). Lagged flows explanatory variables are also used by Gil-Bazo and Ruiz-Verdú (2009 …”

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.…”