City, University of London Institutional Repository
Citation: Ferreira, M. A., Keswani, A., Miguel, A. F. and Ramos, S. (2012). The flow-
performance relationship around the world. Journal of Banking & Finance, 36(6), pp. 1759-
1780. doi: 10.1016/j.jbankfin.2012.01.019
This is the accepted version of the paper.
This version of the publication may differ from the final published
version.
Permanent repository link: https://openaccess.city.ac.uk/id/eprint/13634/
Link to published version: http://dx.doi.org/10.1016/j.jbankfin.2012.01.019
Copyright: City Research Online aims to make research outputs of City,
University of London available to a wider audience. Copyright and Moral
Rights remain with the author(s) and/or copyright holders. URLs from
City Research Online may be freely distributed and linked to.
Reuse: Copies of full items can be used for personal research or study,
educational, or not-for-profit purposes without prior permission or
charge. Provided that the authors, title and full bibliographic details are
credited, a hyperlink and/or URL is given for the original metadata page
and the content is not changed in any way.
City Research Online: http://openaccess.city.ac.uk/ publications@city.ac.uk
City Research Online
The Flow-Performance Relationship Around the World
*
Miguel A. Ferreira
†
Universidade Nova de Lisboa
Aneel Keswani
‡
Cass Business School - London
Antonio F. Miguel
§
ISCTE - Lisbon University Institute
Sofia B. Ramos
**
ISCTE - Lisbon University Institute
This Version: January 2011
*
We thank seminar participants at Cranfield University, Exeter University, Leeds University, LMU Munich University, and
conference participants at the 2010 ISCTE Annual Finance Conference, 2009 Leading Lights in Mutual Funds Conference at
Cass Business School, and the European Finance Association 2010 meeting (Frankfurt). We are also grateful to Vikas Agarwal,
Susan Christoffersen, Keith Cuthbertson, Javier Gil-Bazo, Min Kim, Ian Marsh, Nick Motson, Dirk Nitzche, Lubos Pastor,
Richard Payne, Ludovic Phalippou, Stefan Ruenzi, Lucio Sarno, Laura Starks, David Stolin, Ian Tonks, Scott Weisbenner, Russ
Wermers and Mungo Wilson for helpful comments.
†
Faculdade de Economia, Universidade Nova de Lisboa, Campus de Campolide 1099-032 Lisboa, Portugal; Email:
miguel.ferreira@fe.unl.pt
‡
Cass Business School; 106 Bunhill Row London EC1Y 8TZ, United Kingdom; Email: a.keswani@city.ac.uk
§
ISCTE-Lisbon University Institute – Lisbon, Av. Forcas Armadas 1649-026 Lisboa, Portugal; Email:
a.freitasmiguel@iscte.pt
**
ISCTE-Lisbon University Institute – Lisbon, Av. Forcas Armadas 1649-026 Lisboa, Portugal; Email: sofia.ramos@iscte.pt
The Flow-Performance Relationship Around the World
Abstract
We use a new dataset to study how mutual fund flows depend on past performance across 28
countries. We show that there are marked differences in the flow-performance relationship
across countries, suggesting that U.S. findings concerning its shape do not apply universally. We
find that mutual fund investors sell losers more and buy winners less in more developed
countries. This is because investors in more developed countries are more sophisticated and face
lower costs of participating in the mutual fund industry. Higher country-level convexity is
positively associated with higher levels of risk taking by fund managers.
JEL Classification: G15; G23
Keywords: Mutual funds; Flow-performance relationship; Mutual fund flows; Convexity
1
1. Introduction
There are numerous papers that have studied how flows depend on past performance using U.S.
mutual fund flow data (e.g., Ippolito (1992), Sirri and Tufano (1998), and Del Guercio and Tkac
(2002)). Most concur that flows are highly dependent on past performance and that U.S.
investors chase winners more intensely than they sell poorly performing funds.
The interest in the flow-performance relationship stems from three main sources. First, fund
flows determine the assets under management of fund management companies and hence their
fees; this means that the flow-performance relationship is paramount for fund families to
understand. Second, the literature has also highlighted that if that the flow performance
relationship is convex that this may encourage fund manager risk taking to increase the
likelihood that they are winners. Third, the way flows respond to past performance also matters
as it has implications for fund persistence. This is because it will determine the degree to which
fund size is affected by past performance which conditions how a fund performs in the future
(Berk and Green (2004)).
The mutual fund industry has been influential in the U.S. financial market for some time, and
this is also now the case in many other countries around the world (Khorana, Servaes, and
Tufano (2005)).
1
The far-reaching influence of the mutual fund industry in most economies
suggests that the dependence of flows on past performance will have implications for the risk
and return that investors experience in stock and bond markets. Yet we have little idea of how
1
At the end of 2007, the world mutual fund industry managed financial assets exceeding $26 trillion (including over
$12 trillion in stocks), more than four times the $6 trillion of assets managed at the end of 1996 (Investment
Company Institute (2009)). The number of mutual funds has also grown dramatically, to more than 66,000 funds
worldwide at the end of 2007. The world share of assets under management outside the U.S. grew from 38% in 1997
to 54% in 2007.
2
this dependence varies around the world, as there is scant work on mutual fund flows beyond the
U.S. We aim to fill this void and to provide new insights into the flow-performance relationship
around the world, in particular, to understand what determines the shape that we observe.
2
We use a worldwide sample of mutual funds to investigate why the intensity with which
investors buy past winners and sell past losers differs across countries. The focus is the role of
economic, financial, and mutual fund industry development in shaping the flow-performance
relationship around the world. Relating the nature of this relationship to the diverse development
levels across countries in our sample is important, because this sheds light on its likely evolution
within countries. This would be difficult to see using individual country data rather than a
sample of countries at different stages of development.
There are several possible explanations for why flow-performance sensitivities differ across
countries, and these can all be related to levels of development. Investors may chase past
favorable performance because they put more weight on the latest fund performance information
or fail to sell losers because they tend to shade the latest performance information upward when
a fund they have purchased underperforms (Goetzmann and Peles (1997)). Investors may also
buy into past winners and not sell past losers because fund families tend to advertise funds that
have recently outperformed rather than drawing attention to poorly performing funds (Sirri and
Tufano (1998)).
3
This suggests that investor sophistication can explain the levels of flow-
performance sensitivities observed as more sophisticated investors will be less behaviorally
biased and will not be persuaded by advertising. Indeed, the U.S. literature has shown that not
2
There are a limited number of studies on fund flows outside the U.S. Dahlquist, Engström, and Söderlind (2000)
study Sweden, while Keswani and Stolin (2008) study the U.K.
3
There are other explanations for why investors do not sell underperformers. Lynch and Musto (2003) argue that
investors may be reluctant to sell poorly performing funds because they expect failing funds will change their
managers or their investment strategy.
