The flow-performance relationship of global investment funds

Abstract

We study how globalization affects the response of mutual fund flows to past performance. For that purpose, we use a novel data set on bond funds from the internationalized Luxembourg fund industry. We find that flows into global funds, i.e. funds issuing shares in several currencies, are more sensitive to past performance than flows to domestic funds, i.e. funds distributing shares in mainly one currency. Moreover, global funds exhibit a higher flow sensitivity to low and high performance, while flows to domestic funds are more reactive to medium performance. These results are robust to using alternative measures of globalization to define domestic and global funds, like the geographical diversification in the distribution of shares and the geographical and currency diversification in the asset portfolio. Thus, the globalization dimension of mutual funds, largely neglected by related studies, raises the sensitivity of flows to past performance and needs to be considered by supervisory authorities.