Mutual Fund Flows Research Articles

An ETF-based measure of stock price fragility

Equity mutual fund flows are commonly employed to measure stock price fragility - a stock’s exposure to non-fundamental demand risk. However, this approach may be biased by confounding fundamental information, potentially underestimating risk exposure. We propose an alternative method that uses the primary market data of exchange-traded funds (ETFs). This approach overcomes many limitations of mutual fund data, incorporates the influence of a broader set of investor demand, and strongly predicts stock return volatility and return comovement. Our study highlights the significant role that the arbitrage trading activity of ETFs play in signaling non-fundamental demand shocks.

Climate policy regime change and mutual fund flows: Insights from the 2020 US election

President Biden campaigned and was elected on a bold “clean energy revolution,” a pledge that drastically reshaped expectations surrounding US climate policy. We study how mutual fund investors respond to this significant shift in environmental priorities. We find that low-carbon funds attract (or retain) $15 billion more investments than high-carbon funds during the three months after the 2020 election compared with the three months before. We also find that low-carbon funds underperform high-carbon funds by between 0.47 % and 0.89 % a month during the same period. These results indicate that Biden's election heightens climate transition risk awareness, prompting investors to hedge this risk by investing more in low-carbon funds and receiving lower returns. The flow effect is more pronounced among retail investors, emphasizing their increased recognition of climate transition risk. We also uncover an interesting clientele effect: investors in low-carbon funds consider continuous carbon risk measures, whereas investors in high-carbon funds do not. Furthermore, our analysis of a US-only fund sample reveals that sensitivity to climate risk is insignificant in 2018 after Morningstar first published low-carbon metrics (unlike Ceccarelli, Ramelli, & Wagner, 2024) but becomes particularly significant following the 2020 election.

Monetary policy and equity returns: The role of investor risk aversion

AbstractThis article examines the role of investor risk aversion in the transmission of monetary policy to stock returns based on U.S. data. Our results show that following an expansionary monetary policy shock, investor risk aversion falls, leading to a decrease in the equity risk premium and an increase in equity returns. Moreover, the returns of high‐beta stocks increase much more than those of low‐beta stocks. Finally, we investigate the mechanism through mutual fund flows. We find that high‐beta funds attract greater inflows in response to lower interest rates, and there is a positive relationship between fund returns and flows. Our findings have policy implications for financial stability.

Taking matters into their own hands: How Investors' stock preferences affect mutual fund flows in China

We examine the impact of investors' stock preferences in mutual funds' portfolios on fund flows in China. Our results indicate that mutual funds with an investment style consistent with individual investors' stock preferences have higher fund flow. We find that it affects only individual investors' fund flow, not institutional investors' fund flow. This impact is greater during periods of low economic policy uncertainty or high investor sentiment. Moreover, this impact is reduced with larger fund size or longer fund age. The reasonable explanation is that investors infer fund managers' skills by analyzing the stocks in the fund's portfolio. This explanation is further validated by the results using index funds as the control group. Our findings challenge the assumption that mutual fund investors fully delegate decisions to professionals. Further analysis reveals there is no significant correlation between these preferences and future returns. Our findings contribute to the study of mutual fund investor behavior from a fresh perspective.

Gold, platinum, and mutual fund flows

Huang and Kilic (2019) demonstrate that gold to platinum price ratio (GP), which proxies for tail risk in the economy, is a priced risk factor in the cross-section of stock returns. We document that GP negatively affects the mutual fund flows of the active equity funds. In cross-sectional regressions, we find that funds with high betas with respect to the change in GP (βΔGP) have larger future fund flows, as such funds provide a hedge against economic distress. Further, βΔGP helps predict the future performance of the fund in the next few quarters. βΔGP also relates negatively to the downside risk of the fund, implying that funds could potentially reduce their left-tail risk by tilting towards securities with above average βΔGP. We also examine the flows to active corporate bond funds and passive funds. While these effects of GP are largely observable for passive funds, they are not as strongly observable for corporate bond funds.

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.

Mutual fund flows and government bond returns

We investigate daily flows to Israeli government bonds mutual funds, which are held primarily by retail investors. We divide the bonds into six categories: nominal/CPI-linked - short-term, intermediate-term, and long-term maturity. We find that unexpected daily net flows are contemporaneously correlated with price changes in all categories, with correlations ranging from 0.094 to 0.221 depending on the bond category. These price changes are significant, and they subsequently reverse fully or mostly within 10 trading days. The price reversal indicates that the initial price changes are due to “price pressure.” We find that these price distortions affect break-even inflation—a measure of inflation expectations. Our findings indicate that even government bonds are affected by retail price pressure.

In Labels we Trust? The Influence of Sustainability Labels in Mutual Fund Flows

In Labels we Trust? The Influence of Sustainability Labels in Mutual Fund Flows

How Do Investors' Stock Preferences Affect Mutual Fund Flows? — Evidence from China

How Do Investors' Stock Preferences Affect Mutual Fund Flows? — Evidence from China

Machine Learning Mutual Fund Flows

Machine Learning Mutual Fund Flows

The Intransitivity of International Mutual Fund Flows

The Intransitivity of International Mutual Fund Flows

Geographic Shareholder Dispersion and Mutual Fund Flow Risk

Geographic Shareholder Dispersion and Mutual Fund Flow Risk

Money never sleeps: Capital flows under global risk and uncertainty

We employ various indexes, namely the geopolitical risk (GPR) index, economic policy uncertainty (EPU) index, and world uncertainty index (WUI), to comprehensively capture multiple dimensions of risk and uncertainty and investigate their influence on capital flows measured by different categories of mutual fund flows and IMF intercountry transaction flows. We find that GPR harms aggregate capital flows of both equity and bond funds, whereas rising EPU only significantly reduces the capital flows of equity funds. Additionally, WUI increases capital flowing into active bond funds, indicating a flight-to-safety effect. Besides, high GPR environments amplify the negative influence of EPU on capital flows of equity funds. Meanwhile, in more geopolitically stable conditions, bond markets may serve as a preferred shelter for navigating EPU. However, we find that the impacts of risk and uncertainty on transaction flows are marginal. Furthermore, we demonstrate that global risk or uncertainty (EPU and WUI) plays a more dominant role than country-specific ones in shaping capital flows. Therefore, this study offers novel insights into how different dimensions of risk and uncertainty can shape capital flows differently and whether the compounding effect of risk and uncertainty differs from that of a single risk or uncertainty.

How does management respond to stock price crashes?

PurposeThe purpose of this study is to investigate (1) how managers respond to stock price crashes, (2) why they respond and (3) how their responses affect shareholders.Design/methodology/approachThis study employs a panel regression with various firm-level controls and firm- and year-fixed effects. The sample is comprised of 101,532 firm-year observations with 11,727 unique firms from 1950 to 2019. Using mutual fund flow redemption pressure as an exogenous variable to stock price crashes, the paper provides further evidence of the causality of documented findings.FindingsManagement becomes more focused on improving transparency, raising investment efficiency, reducing agency conflicts and regaining the trust of shareholders by investing in social capital and employee welfare. These actions increase firm value. This study also suggests that management undertakes these actions out of concern for their tenure of employment.Originality/valueThe catalysts of stock price crashes are well documented, but much less is known about what happens following stock price crashes. This study provides more insights into the understanding of corporate crisis management practices following adverse events.

Are banks better money doctors? An analysis of mutual fund flows of bank and non-bank funds using Canadian data

This study uses Canadian mutual fund data from 2005 to 2020 to compare fund flows of bank managed mutual funds with those of non-bank managed mutual funds. We document that relative to non-bank funds, bank funds consistently exhibit lower flows on a monthly basis. Moreover, bank funds demonstrate lower flow-sensitivity to performance than non-bank funds. Further investigation reveals this effect is driven largely by lower outflows following poor performance, as it appears that these investors are trusting of fund managers enough to stay the investment course. We further separate the data into equity, bond, and balanced funds and find that the flow difference between bank and non-bank funds is largest in equity funds, smaller in balanced funds, but non-existent in bond funds. Finally, we document that this effect is dramatically weakening over our sample period. Our study has meaningful implications for regulators, fund investors, banks, as well as mutual fund managers.

Does Corporate Cash Holding Level Explain Mutual Fund Flow? Global Evidence

This study investigates the influence of corporate cash holdings on the flow of open-end equity mutual funds. Building on the economic mechanisms that drive investors’ decisions when they construct their portfolio, the study analyses a comprehensive global dataset that includes 13,674 firms and 58,406 funds from 23 countries for the period from 2008 to 2017. Multiple regression models (pooled and fixed effect) are implemented to explore this relationship. The results show that there is a negative relationship between mutual fund flow and corporate cash holdings which indicates the significant role corporate cash holding policies have on the mutual fund industry. This article contributes to the literature by adding a new factor that can explain mutual fund investors’ behaviour. To the best of our knowledge, it is the first study to examine the relationship between corporate cash holdings and mutual fund flow, and one of the few studies to examine the influence of corporate-level decisions on the mutual fund industry. The results could help fund managers to better forecast future fund flow by considering corporate-level policies, namely cash holdings.

TV media sentiment, mutual fund flows and portfolio choice: They do not put their money where their sentiment is

The central role of the media for people’s sentiment and for capital markets has been analysed by a broad range of literature, referenced from several strands of academic research. Applying a vector autoregression method to a unique set of TV news, consumer sentiment and excess flows of mutual funds, I have found evidence that daily TV news is reflected in consumer sentiment and that this reflection varies according to specific news topics. However, I have not found any evidence that this has an impact on viewers’ portfolio allocation decisions. Mutual fund investors neither seem to put their money where their newly gained insights from the TV news are, nor where their sentiment is. Anchoring also appears to play a role, at least for US investors. These findings are robust in relation to different measures of fund flows and as an alternative indicator for sentiment in the news media.

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.

The importance of labels for sustainable investments: SFDR versus Morningstar globes

ABSTRACT We use the entropy balancing method to study the impact of sustainability labels on mutual fund flows and returns. We compare the informativeness of the ESG risk metrics developed by a specialized agency – the Morningstar sustainability rating – with the ESG disclosure requirements introduced in the European Union by the Sustainable Finance Disclosure Regulation. We find investors to follow the Morningstar’s ESG ratings to inform their portfolio decisions, with more sustainable funds attracting larger net inflows. On the contrary, regulation-induced labels are generally not relevant to explain flow heterogeneity, with the only exception of Article 9 funds in which sustainable goals are the core investment objective; these latter funds also outperform their peers in terms of returns in line with ESG preferences strengthening over time.

Environmental, Social, and Governance Considerations in WTI Financialization through Energy Funds

This study investigates interactions between energy funds and the oil market and examines the influence of environmental, social, and governance (ESG) criteria in dynamic responses by fund managers and investors. We test for price and volatility transmission (also referred to as “spillover”) between energy funds and the oil market using recently developed econometric techniques. After identifying specific information flows, we investigate whether certain fund characteristics, including several ESG dimensions, are associated with the existence of information transmissions. Then, in logit regressions, we seek to identify if energy fund managers and their investors make decisions using information regarding ESG metrics, including fossil fuel involvement. The results confirm bidirectional price and volatility transmission between energy funds and the oil market, consistent with evidence of the financialization of energy markets that has been identified in recent studies. Several ESG dimensions are shown to influence investor sentiment and affect price and volatility interactions. Dynamic investor decisions in funds in reaction to oil prices do not appear to be strongly influenced by the fossil fuel involvement of the funds. Fund flows do appear to influence the oil market, with fund fossil fuel involvement being an important factor. This paper evaluates the impact of granular ESG characteristics on energy mutual fund flows, price, and volatility interactions with the oil market. While our results support the findings from previous studies, they also provide several new insights into the impacts of ESG criteria and investor behavior, particularly the dynamic response by fund managers and energy market investors related to the fossil fuel involvement of the funds.