Abstract
In the mutual fund literature, it is an established fact that investors “chase past performance”. However, the opposite impact of flows on performance is widely discussed. Mainly, liquidity costs are held responsible for short-term erosion of performance, while high inflows enhance performance over longer horizons. I investigate this relation for various groups of equity, bond, and money market funds and find significant outperformance in high inflow funds over several months, especially for specific bond fund groups. In addition, I test whether this information can be exploited using simple investment strategies but find that the abnormal returns are too low to offset associated costs.
Highlights
Introduction and Literature ReviewIn the field of mutual funds one important strand of research deals with money flows and the relation between investor flows and performance
To assess the impact of fund flows on the performance of different fund groups, I use monthly rebalanced decile-portfolios (e.g., Chen et al [27]). These are constructed by a monthly ranking of all funds currently existing by their lagged fund flows and value weighting the returns of all funds allocated to a certain portfolio by their beginning-of-month total net assets (TNA)
Size is denoted in Mio US$ and represents the time series mean of the monthly total net assets (TNA) of the fund group
Summary
In the field of mutual funds one important strand of research deals with money flows and the relation between investor flows and performance. Adjusting for liquidity-motivated trading, he finds significant levels of skill among mutual fund managers Further confirmation of these results is reported in related studies by, e.g., Alexander et al [32], who analyze returns to trading on information vs returns to trading on flows. I am aware of no study systematically testing simple investment strategies for exploiting the information content in past fund flows in order to earn abnormal returns, so-called “flow chasing” In this empirical study I first examine whether there is a significant relation between fund size and performance, economies or diseconomies of scale.
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