Flow-performance Relationship Research Articles

On the valuation skills of corporate bond mutual funds

Abstract The corporate bond market is larger, more illiquid, and presumably less efficient than the equity market. These features provide numerous profit opportunities for corporate bond mutual funds that are unique to the corporate bond market. However, whether corporate bond mutual funds have the valuation skills needed to take advantage of these opportunities is unclear. We introduce a novel measure to assess the valuation skills of investment-grade corporate bond mutual funds, which we refer to as the valuation accuracy score (VAS). VAS recognizes funds holding more underpriced and less overpriced corporate bonds as ex-ante having better valuation skills. It predicts future fund performance, is stable over time, and is unrelated to other sources of skill. Investors chase the performance of higher-VAS funds more aggressively and exhibit a convex flow–performance relation among these funds.

Investor flows, performance, and fragility of U.S. municipal bond mutual funds

We examine the determinants of investor flows into, and the potential market fragility imposed by, U.S. municipal bond mutual funds. We find that funds have a linear flow-performance relationship that is consistent with effective liquidity management strategies. Funds use liquid holdings to partially offset net redemptions, but trade municipal bonds in proportion to flows. Funds increase their liquid holdings after flow volatility increases. The fact that funds use a vertical slice approach as a primary strategy is not surprising because they maintain small amounts of liquid securities. Our evidence is consistent with investors not being concerned with municipal bond mutual funds promoting run-risk.

The Importance of Risk Preference Parameters in Prospect Theory: Evidence from Mutual Fund Flows

In this paper, we use the well-documented mutual fund flow-performance relationship to infer information about investors’ preferences. We show that applying preference parameter values from experimental settings to market data can significantly understate the role of prospect theory in explaining investor behavior. We find evidence that mutual fund investors exhibit loss aversion and differential attitudes toward risk over losses (risk-seeking) and gains (risk-averse) but no significant probability weighting when evaluating fund performance. Our results apply more strongly to retail funds compared to institutional funds, consistent with the view that prospect theory is more relevant for retail investors. Finally, we show that, for parameter values that best explain fund flows, prospect theory outperforms the global risk aversion framework and widely-used asset pricing models in explaining investors’ responses to fund performance.

Flow in Relation to Academic Achievement in Online-Learning: A Meta-Analysis Study

ABSTRACT Flow is an optimal experience that has received particular attention in learning due to its potential association with enhanced learning achievement. However, the strength and direction of the putative flow-fulfillment relationship remain unclear. Therefore, a PRISMA-directed systematic review was conducted in 2022 to examine the empirical evidence for the flow-performance relationship, examine underlying mechanisms, and assess the quality of the current evidence. An online database was used to search for peer-reviewed articles examining the relationship between flow and sense of accomplishment in online courses. Results were collated into a narrative synthesis and meta-analysis. Thirty two articles met the inclusion criteria. The overall quality of the studies was fairly good, Pooled effect sizes (r = 0.48, [0.39;0.59]) indicated a moderate flow-performance relationship across a range of online education. However, current evidence cannot determine the causal direction of this relationship or the mechanisms that mediate it. The many conceptual and methodological challenges facing flow research are discussed and suggestions for future work are outlined.

Flow-Performance Relationship of French Bond Funds

Flow-Performance Relationship of French Bond Funds

Mutual Fund Flow-Performance Relation

Mutual Fund Flow-Performance Relation

Target Date Fund Flows Amidst the COVID-19 Pandemic

The popularity of target date funds (TDFs) has recently increased among defined contribution pension plans. Despite their growing importance, how TDF flows and flow-performance relationships have changed in response to the COVID-19 pandemic is yet to be examined, particularly during the March 2020 market turmoil, when bond funds witnessed unprecedented outflows. We find that short-horizon TDFs experienced sizable outflows of over $13.5 billion between February and April 2020, whereas mid- and long-horizon TDFs received inflows over the same period. Given that short-horizon TDFs hold a much larger fraction of their portfolios on fixed-income securities, the outflows from these TDFs, whose fund-of-funds investment structure has been identified as a source of intra-family liquidity provision in previous studies, may have compromised the effectiveness of this liquidity provision mechanism during the COVID-19 market crash. We find that in the aftermath of the pandemic, the flow–performance relationship of short-horizon TDFs becomes markedly more concave, which hints at investors’ greater awareness of the downside risks associated with large outflows following their experience during the COVID-19 turmoil.

The performance distribution and managerial skill of passive funds: evidence from the Korean market

This study investigates the performance distribution of passive funds in the Korean market and compares it with the performance distribution of active funds. The key findings are as follows, first, the performance distribution of passive funds has a thicker tail compared to that of active funds. There are passive funds that achieve outstanding performance, and both the false discovery rate (FDR) analysis and simulation analysis suggest that their outperformance is driven by managerial skill rather than luck. Second, passive fund performance is more persistent compared to active fund performance. Third, investors are less responsive to passive fund performance compared to active fund performance. The fund flow-performance relationship is significantly positive for active funds but not for passive funds. This implies that investors may not recognize the managerial skills of passive funds.

Prospect theory and mutual fund flows: Evidence from China

Using a sample of Chinese mutual funds over 2007–2021, we explore whether prospect theory (PT) accurately represents the risk preferences and behavior of Chinese fund investors. We find a significant positive relationship between the fund-level PT value and future flows. After controlling for the other lottery-type characteristics of fund returns, various characteristics of funds and fund families, and the convexity of the flow–performance relationship, the relation remains robust. Moreover, investors’ preferences for the lottery-type characteristics of PT values rather than increased fund visibility induce net fund inflows. Further, PT values positively and significantly predict future fund performance and skills. In the Chinese market, the flow–PT relationship is present among individual and institutional investors. Hence, we further expand the application scope and influencing mechanism of PT, providing a Chinese perspective of its application.

Identifying influential financial stocks using simulation with a two-layer network

Risk spillover from one stock to another tends to create a contagion effect in the stock market. Fire sales due to the overlapping portfolios of mutual funds can amplify the contagion risks, leading to a downward spiral of stock prices. In this paper, we simulate this downward spiral phenomenon for the Chinese financial stocks based on a two-layer network structure and aim to identify the influential financial stocks based on their individual induced systemic risks. Our findings show that stock liquidity and the concentration of funds’ holding on stocks play important roles in determining systemically important financial institutions. Our results also confirm the statements of “too-big-to-fail” and “too-interconnected-to-fail” of financial institutions in the Chinese market. Our results show that a more sensitive flow-performance relationship of mutual funds can amplify the contagion risk by 41%. However, the magnitude can be more drastic in a low market liquidity scenario, where the contagion risk is boosted by 160%.

Fund flows and performance: New evidence from retail and institutional SRI mutual funds

In this paper we provide a comprehensive analysis of the performance of US SRI mutual funds as well as its relation to the flow of new money that those funds experience in the context of investors sophistication. In particular, we compare the performance of SRI funds with their conventional peers, matched by both managers and characteristics criteria, using several performance measures. We investigate the role of investors sophistication and its influence on the flow-performance and performance-flow relations within the retail and institutional SRI fund shareclasses. For the analysis of the flow-performance relation we use portfolio approach along with monotonic relation test, while the shape of the flow-performance relation is studied using piecewise linear panel regressions. For the performance-flow relation, the flow and unexpected flow portfolios are formed and their risk-adjusted performance is evaluated. We find that SRI mutual fund sector earns positive abnormal returns before expenses and retail SRI funds outperform their institutional peers both, before and after fees. No differences in performance when we consider SRI and conventional funds run by the same management companies. Moreover, we find a positive flow-performance relation which is convex for retail SRI funds but no convexity is found for the institutional ones. We cannot confirm the smart money effect for retail SRI funds, instead we find a dumb money effect for SRI institutional funds. Our paper provides new insights into the role of the investors sophistication for those relations in the presence of sustainability preferences.

Mutual Fund Performance and Flow-Performance Relationship Under Ambiguity

Mutual Fund Performance and Flow-Performance Relationship Under Ambiguity

Risk factors, uncertainty, and investment decision: evidence from mutual fund flows from India

Asset pricing theories provide an understanding of the risk factors that determine the price of assets. The identification of risk factors assists investors in seeking out profitable investment opportunities. The difficulty in observing how investors identify such opportunities and how they react to it has largely restricted the literature from determining the factors that matter to an investor. There is a paucity of empirical studies that give insight into the investment decision-making process of an investor. Some of the recent studies that seek to fill this gap have used mutual fund flows to infer which asset pricing model investors use. The fund flows are used as a measure of investors’ response for the identification of a positive net present value investment opportunity. These studies suggest that the Capital Asset Pricing Model (CAPM) is closest to the asset pricing model used by investors in the US market. Taking this literature forward, we enquire whether investors from Indian markets exhibit a similar pattern when making investment decisions. Using the fund flows to actively managed equity schemes, we have investigated the risk factors that matter for mutual fund investors in India for the period from April 2006 to December 2019. We use alternative performance measure and then evaluate the sensitivity of fund flows to each of the performance measures. Our results suggest that investors assess the performance of competing investment opportunities based on naïve measures. Further, though uncertainty has a negative impact on fund flow, the flow–performance relation is not sensitive to the level of uncertainty.

The flow-performance relationship of global investment funds

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.

Hedge fund sales fees and the flow of funds around the world

This paper presents evidence on hedge fund sales fees (sometimes viewed as “kickbacks”) around the world. Using a novel dataset of onshore and offshore Hedge Funds from 69 countries, over the time period 1998–2020, we show that sales fees have been extremely common, particularly among offshore funds. Also, we show the use of sales fees was more common in the 1990s and has dropped off in the 2000s and 2010s. We present evidence that shows sales fees impact fund sales but not fund performance. Sales fees flatten the flow-performance relationship, meaning that capital is less likely to leave a fund in response to poor performance, and this reduction is due to sales fees. Funds with sales fees have significantly more performance persistence since they are less likely to see larger capital withdraws. We present a wide array of robustness checks and discuss policy implications associated with the use and reporting of sales fees.

Behavioral finance and the architecture of the asset management industry

The standard portfolio approach assumes that investors maximize expected utility, and that the Markowitz mean–variance standard portfolio optimization approach can be applied. Behavioral research, however, indicates that investors’ behavior with respect to risk or uncertainty is not consistent with expected utility. Notably, decision makers transform probabilities. Most of the academic literature integrating those aspects, however, focuses on so-called financial market anomalies but does not focus on the structural impact those behavioral aspects might have, notably in terms of industrial organization of the asset management industry. This paper provides a survey of the asset management industry and argues that the architecture of the asset management industry is inconsistent with the standard expected utility framework. The origin of the industrial organization of the asset management industry stems from the convexity of the flow–performance relationship, which is due to prospect theory effects. The convexity of the flow–performance relationship explains the inflation of mutual funds and fund families, a phenomenon inconsistent with the Mutual Fund Separation Theorem.

The Determinants of Convexity in the Flow-Performance Relationship: A Study of Pakistani Mutual Funds

Purpose: This paper aims to study the potential sources of convexity in the flow-performance relationship curve in the Asian region.
 Design/Methodology/Approach: The sample for this study includes 75 mutual funds from three broader investment categories: stock funds, balanced funds, and asset allocation funds. The data is collected from the financial reports of the respective funds from 2011 to 2020. The study employs the ordinary least square method on unbalanced panel data. 
 Findings: The findings show that the fund flows are positively associated with fund performance in the Pakistani mutual fund market. The result also confirmed that the shape of the relationship is convex. The fund size and marketing expenditures are positively associated with convexity. However, fund age does not affect the convexity. The Result also confirmed that fund rating is not an appropriate proxy for fund size.
 Practical Implication- In period of low performance mutual fund management can retain their investors by increasing their marketing expenditures and fund size.
 Originality/Value: This paper fulfills an identified need to study the sources behind non-linear flow-performance relationship curve in the Asian region. This study also aims to resolve the conflict in literature relating to the fund size on the convexity of the flow performance relationship.

Risk-shifting in institutionally-sponsored funds

In this study, I examine the flow-performance relation and risk-shifting behavior in institutionally-sponsored funds. The flow-performance relation is symmetric in institutionally-sponsored funds. Even with a symmetric flow-performance relation, which does not yield option-like incentives for risk-shifting, institutionally-sponsored funds still engage in risk-shifting behavior such that past losers increase risk more than past winners. This pattern of risk-shifting behavior is especially strong between long-term winners and losers, and between top and bottom performers. The prevalence of asymmetric performance-based fee contracts in institutionally-sponsored funds is a potential driver of their risk-shifting behavior.

Ambiguity Exposure, Mutual Fund Performance, and Flow-Performance Relationship

Ambiguity Exposure, Mutual Fund Performance, and Flow-Performance Relationship

Is Mutual Fund Flow Related with Fund Performance? An Empirical Study of Regular Plan Mutual Funds in India

This paper examined the fund flow and fund performance relationship using sample data of 144 Indian open-ended equity and balanced regular mutual funds, consisting of eight different fund categories from April 2014 to March 2018. We observed a significant positive association between fund flow and fund recent past performance through Sirri and Tufano (1998) fractional flow model, piecewise regression, and Fama-MacBeth’s (1973) regression. The results reported that retail investors were sensitive towards the fund’s recent past performance and it indicated the relative sophistication in the Indian mutual fund industry. The findings, as supported by the negative and significant coefficients of all panels, suggested that retail investors preferred investing in less risky funds. The study provided insights into the investment behavior, too, in terms of fund flow and their relationship with funds’ recent performance, risk, expense ratio, fund category flow, fund’s age, asset management company’s age, and the experience of the fund manager. This is a pioneering work that estimated the regular plan fund flow-performance relationship post regulatory reforms, such as the introduction of direct plans, the extra commission allowed to beyond the top 15 cities (B15 cities) distributors, introduced by the Securities and Exchange Board of India.