Mutual fund flow-performance dynamics under different market conditions in South Africa

Richard Apau,Paul-Francois Muzindutsi,Peter Moores-Pitt

doi:10.21511/imfi.18(1).2021.20

Richard Apau, Paul-Francois Muzindutsi + Show 1 more

Open Access

https://doi.org/10.21511/imfi.18(1).2021.20

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Abstract

Questions regarding the specific factors that drive continuous cash allocations by investors into portfolios of actively managed funds, despite consistent underperformance, continue to remain an inexhaustive aspect of the literature that calls for further investigations. This study assesses the dynamic relationship between fund flow and performance of equity mutual funds in South Africa under different market conditions. The study employs a GMM technique to analyze the panel data of 52 South African equity mutual funds from 2006 to 2019. The analysis found that convexity is prevalent in the flow-performance relationship, where fund contributors in subsequent periods allocate recent underperforming and outperforming funds disproportionate cash. This finding is evident in the lack of significance in the past performance effects on subsequent fund flows. The study found that lagged fund flows, fund size, fund risk, and market risk drive subsequent fund flows under changing conditions of the general market and fund markets. Overall, it is posited that fund contributors and asset administrators adapt to prevailing market dynamics relative to trading decisions. As a result, this affirms the normative guidelines of the Adaptive Markets Hypothesis, leading to the conclusion that exogenous factors drive fluctuations in fund flows in South Africa.

Highlights

The South African fund industry’s trend statistics show that average returns earned across equity fund managers trailed the market by 34.01 percent in one year, trailed it by 84.66 percent in three years, and recorded a significant underperformance of 91.03 percent in five years (S&P, 2019)
This finding is evident in the lack of significance in the past performance effects on subsequent fund flows
This study presents original perspectives on the relationship between mutual fund flow and performance under different conditions of the general equity and fund markets in South Africa

Summary

Introduction

The South African fund industry’s trend statistics show that average returns earned across equity fund managers trailed the market by 34.01 percent in one year, trailed it by 84.66 percent in three years, and recorded a significant underperformance of 91.03 percent in five years (S&P, 2019). The volume of new cash inflows into South African equity mutual funds increased, with over R1.9 trillion assets under management at the end of the third quarter of 2018 trading year (Rangongo, 2018).

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