Abstract
We use data from 13 countries to study differences in the flow-performance sensitivity between institutional and retail investors. Our results show marked differences between non-US and the US in how institutional and retail investors react to past performance. Compared to retail investors, institutional investors sell more poor performers and buy less top performers outside the US, while there is no difference in how institutional and retail investors react to past performance in the US. When we split our sample into countries with more and less sophisticated investors, our results also show significant differences in the flow-performance sensitivity of institutional and retail investors. Overall, our findings are consistent with institutional investors being more sophisticated than retail investors but only in countries where investors are on average less sophisticated.
Highlights
The US mutual fund literature finds a non-linear relation between flows and past performance, as investors tend to buy intensively top performers and do not sell poor performers with the same intensity [1] [2] [3] [4]
In countries where the population is more financially literate and where the financial markets are more sophisticated—like the US—retail investors are expected to be on average more sophisticated and it is less likely that we find differences on how retail and institutional investors react to past performance
Overall our results confirm our hypothesis: 1) in countries where investors are more sophisticated, we find no differences between the flow-performance sensitivity of retail funds and institutional funds; 2) in countries where investors are less sophisticated, we find significant differences on how retail investors and institutional investors react to past performance, and the response of retail investors to past performance increase the convexity of the flow-performance relationship
Summary
The US mutual fund literature finds a non-linear relation between flows and past performance, as investors tend to buy intensively top performers and do not sell poor performers with the same intensity [1] [2] [3] [4]. The more investors buy winners and the less they sell poor performers the more convex is the flow-performance relationship. Fund characteristics, including performance volatility [3].
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