The Winner Takes it All: Outperformance Drives Subsequent Flows in South African Unit Trust Funds

Abstract

The relationship between unit trust (mutual funds) performance and subsequent investment flows into and out of funds has been, for decades, the focus of many international studies. This study builds on the prior findings of the flow-performance relationship and aims to quantify the inflow into funds which outperform. The flow-performance relationship is important for investment businesses to understand, because of the implications this has on the profitability of a fund. The research applies a portfolio time-series methodology to Morningstar SA data and a buy-and-hold analysis. Two unit trust categories are tested, namely General Equity and Multi-asset High Equity funds, and within each category, single manager funds and fund of funds are tested separately. Funds are ranked according to their past performance over a 14-month period, and assigned into quintiles. Net flows into each fund in the subsequent quarter are then determined, and the process repeated on a quarterly basis. We find strong evidence that equity funds need to perform in the top quintile to attract funds, and note that relative performance to peers is more important to investors than performance relative to other benchmarks.