International equity funds,performance, and investor flows: Australian evidence

This is the first paper in the Australian literature to examine the investment performance of actively managed international equity funds (domiciled in Australia). Both institutional and retail international equity funds are assessed together with the impacts of investor fund flows on portfolio returns. Performance is also evaluated using conditional measures that account for public information in the global economy, however, despite an improvement in the measurement of risk-adjusted returns, performance remains consistent with an efficient global market. These findings support prior research, which concludes that active management does not provide investors with superior returns to passive indices. When consideration is given to the liquidity service provided by active managers, fund flows are shown to negatively impact on performance.     

The Determinants and Implications of Mutual Fund Cash Holdings: Theory and Evidence

In this article, I examine the determinants and implications of equity mutual fund cash holdings. In cross-sectional tests, I find evidence generally supportive of a static trade-off model developed in the article. In particular, small-cap funds and funds with more-volatile fund flows hold more cash. However, I do not find that fund managers with better stock-picking skills hold less cash. Aggregate cash holdings by equity mutual funds are persistent and positively related to lagged aggregate fund flows. Aggregate cash holdings do not forecast future market returns, suggesting that equity funds as a whole do not have market timing skills.     

What moves international stock and bond markets?

We study the relation between international mutual fund flows and the different return components of aggregate equity and bond markets. First, we decompose international equity and bond market returns into changes in expectations of future real cash payments, interest rates, exchange rates, and discount rates. News about future cash flows, rather than discount rates, is the main driver of international stock returns. This evidence is in contrast with the typical results reported only for the US. Inflation news instead is the main driver of international bond returns. Next, we turn to the interaction between these return components and international portfolio flows. We find evidence consistent with price pressure, short-term trend chasing, and short-run overreaction in the equity market. We also find that international bond flows to emerging markets are more sensitive to interest rate shocks than equity flows.     

Investor flows and stock market returns

This study simultaneously analyzes the relation between aggregate stock market returns and cash flows (net purchases of equity) from a broad array of investor groups in the United States over a long period of time from 1952 to 2004. We find strong evidence that quarterly flows are autocorrelated for each of the different investor groups. We further document a significant and positive contemporaneous relation between stock market returns and flows of Mutual Funds and Foreign Investors.     

Mutual fund flows,expected returns,and the real economy

This paper investigates the relation between mutual fund flows and the real economy. The findings of this paper support the theory that the positive co-movement of flows into equity funds and stock market returns is explained by a common response to macroeconomic news. Variables that predict the real economy as well as the equity premium – in particular dividend-price ratio, default spread, relative T-Bill rate and consumption-wealth ratio – are related to fund flows and can account for the correlation of flows and market returns. Furthermore, consistent with the information-response hypothesis, mutual fund flows are forward-looking and predict real economic activity.     

Dedicated REIT Mutual Fund Flows and REIT Performance

This study examines the effects of weekly and monthly capital flows into the dedicated REIT mutual fund sector on aggregate REIT returns and, simultaneously, the effects of industry-level REIT returns on subsequent REIT mutual fund flows. The dynamic relation between REIT capital flows and returns is estimated using vector autoregression (VAR) techniques. Unlike static regression techniques, our dynamic model produces estimates of the short-run relationships, long-run relationships, impulse response functions, and forecast variance decompositions. We find evidence that REIT mutual fund flows are positively and significantly related to prior returns, while prior REIT mutual fund flows do not significantly influence REIT returns. However, contemporaneous flows do appear to have an initial positive effect, which is partially reversed one period later. The positive contemporaneous effect, however, is the result of unexpected REIT mutual fund flows, while the expected portion is insignificant.     

Equity Capital Flows and Demand for REITs

REITs are attractive to investors due to their unique characteristics such as high dividend yields, low correlation with common stocks, and a potential hedge against inflation. Thus the market demand curve of REIT equities may not be horizontal. This paper examines the shape of the market demand curve for REIT equities by employing REIT equity capital flows as a proxy for REIT aggregate demand. Our results do not support a downward demand curve for REIT equities. That is, we do not find evidence for the price-pressure effect in REIT returns. Instead, we find it is REIT returns that affect REIT equity capital flows rather than REIT equity flows that affect REIT returns. The results are consistent when we allow for the presence of market fundamental variables in our analysis. In addition, a variance decomposition analysis suggests that REIT equity capital flows do not cause revisions in expected cash flows (dividends) that are strong enough to impact REIT returns. Thus our findings are consistent with implications that the market demand curve for REIT equities is horizontal.     

Mutual Funds and Stock and Bond Market Stability

The unprecedented growth of mutual funds has raised questions about the impact of mutual fund flows on stock and bond prices. Many believe that the equity bull market of the 1990s is attributable to the huge flows of funds into equity mutual funds during this period and that a withdrawal of those funds could send stock prices plummeting. This article investigates the relationship between aggregate monthly mutual fund flows (sales, redemptions, and net sales) and stock and bond monthly returns during a 30-year period beginning January 1961 utilizing Granger causality and instrumental variables analysis. With one exception, flows into stock and bond funds have not affected either stock and bond returns. The exception is 1971–1981, when widespread redemptions from equity mutual funds significantly depressed stock returns. In contrast, the magnitude of flows into both stock and bond funds are affected significantly by stock and bond returns.     

Institutional trading and stock returns

In this study, we explore the dynamics of the relation between institutional trading and stock returns. We find that stock returns Granger-cause institutional trading (especially purchases) on a quarterly basis. The robust and significant causality from equity returns to institutional trading can be largely explained by the time-series variation of market returns, that is, institutions buy more popular stocks after market rises. Stock returns appear to be negatively related to lagged institutional trading. A further analysis of the behavior of trading and the returns of the traded stocks reveals evidence that stocks with heavy institutional buying (selling) experience positive (negative) excess returns over the previous 12 months.     

Emerging Market Exposures and the Predictability of Hedge Fund Returns

We examine emerging market and global macro hedge funds and find a significant positive relation between hedge funds’ future returns and their exposure to both emerging market equities and emerging market currencies. We present evidence that the strong predictive power of emerging market betas is related to the superior market‐timing ability of these fund managers. Results are robust after controlling for commonly used hedge fund factors, the emerging market equity index, lagged fund returns, liquidity risk, and fund characteristics. Our results suggest that hedge funds can earn positive excess returns by timing their exposure to emerging market securities.     

Is Index Performance Achievable? An Analysis of Australian Equity Index Funds

This article examines the performance of index equity funds in Australia. Despite the significant growth in index funds since 1976, when the first index mutual fund was launched in the U.S., research on their performance is sparse in the U.S. and non-existent in Australia. This study documents the existence of significant tracking error for Australian index funds. For example, the magnitude of the difference between index fund returns and index returns averages between 7.4 and 22.3 basis points per month across index funds operating for more than five years. However, there is little evidence of bias in tracking error implying that these funds neither systematically outperform nor underperform their benchmark on a before cost basis. Further analysis provides evidence that the magnitude of tracking error is related to fund cash flows, market volatility, transaction costs and index replication strategies used by the manager.     

Relations between mutual fund flows and stock market returns in Korea

This paper analyses relations between stock market returns and mutual fund flows in Korea. A positive relationship exists between stock market returns and mutual fund flows, measured as stock purchases and sales and net trading volumes. In aggregate, mutual funds are negative feedback traders. Standard causality tests suggest that it is predominantly returns that drive flows, while stock sales may contain information about returns. After controlling for declining markets, the results suggest Korean equity fund managers tend to increase stock purchases in times of rising market volatility, possibly disregarding fundamental information, and to sell in times of wide dispersion in investor beliefs.     

Investor Sentiment and Stock Returns: Evidence from Turkey

This paper investigates the relation between investor sentiment and stock returns on the Istanbul Stock Exchange, employing vector autoregressive (VAR) analysis and Granger causality tests. The sample period extends from July 1997 to June 2005. In the VAR models, stock portfolio returns and investor sentiment proxies are used as endogenous variables. Two dummy variables accounting for natural and economic crises are used as exogenous variables. The analysis results suggest that, excepting shares of equity issues in aggregate issues, stock portfolio returns seem to affect all investor sentiment proxies, namely closed-end fund discount, mutual fund flows, odd-lot sales-to-purchases ratio, and repo holdings of mutual funds. Investor sentiment does not appear to forecast future stock returns; only the turnover ratio of the stock market seems to have forecasting potential.     

Investment behavior of mutual fund shareholders: The evidence from aggregate fund flows

The relationship of stock market returns with components of aggregate equity mutual fund flows (new sales, redemptions, exchanges-in, and exchanges-out) is examined. Vector autoregressions and tests of linear feedback show that the flow-return relationship exists solely between returns and exchanges-in and -out. Further, only exchanges-out are responsible for the contrarian flow behavior noted by Warther (1995). The evidence suggests that the various components reflect different investor objectives and information.     

Nonfinancial Firms as Cross‐Market Arbitrageurs

I demonstrate that nonfinancial corporations act as cross‐market arbitrageurs in their own securities. Firms use one type of security to replace another in response to shifts in relative valuations, inducing negatively correlated financing flows in different markets. Net equity repurchases and net debt issuance both increase when expected excess returns on debt are particularly low, or when expected excess returns on equity are relatively high. Credit valuations affect equity financing as much as equity valuations do, and vice versa. Cross‐market corporate arbitrage is most prevalent among large, unconstrained firms, and helps account for aggregate financing patterns.     

Do Fund Flow‐Return Relations Depend on the Type of Investor? A Research Note

This study investigates whether the relation between aggregate fund flow and market returns differs between retail and institutional funds. For the retail fund sample, we document a contemporaneous relation between flow and market returns and also find evidence of feedback trading. In contrast, there is little evidence of a relation between flow and market returns for the institutional fund sample. Consequently, it appears that retail and institutional fund investors use different investment strategies, with retail investors following a more naive strategy. We find no evidence of flow inducing price pressure for either type of fund.     

Mutual fund volatility timing and management fees

This paper shows that compensation incentives partly drive fund managers’ market volatility timing strategies. Larger incentive management fees lead to less counter-cyclical or more pro-cyclical volatility timing. But fund styles or aggregate fund flows could also account for this relation; therefore, we control for them and find that the relation between fees and volatility timing still holds. Results show that less aggressive fund styles are associated with pro-cyclical volatility timing, and that volatility timing and flow timing are negatively related. We also find that pro-cyclical timing mostly improves funds’ average excess returns, Sharpe ratios, and alphas.     

Measuring investor sentiment with mutual fund flows

We investigate a proxy for monthly shifts between bond funds and equity funds in the USA: aggregate net exchanges of equity funds. This measure (which is negatively related to changes in VIX) is positively contemporaneously correlated with aggregate stock market excess returns: One standard deviation of net exchanges is related to 1.95% of market excess return. Our main new finding is that 85% (all) of the contemporaneous relation is reversed within four (ten) months. The effect is stronger in smaller stocks and in growth stocks. These findings support the notion of “noise” in aggregate market prices induced by investor sentiment.     

Pricing credit default swaps with bilateral value adjustments

The aim of this work is to examine the influence of mutual fund flows on market timing models, thus providing unbiased timing coefficients. However, as this control is motivated by the existing relationship between mutual fund flows and market returns, we first analyse this relationship, considering previous and concurrent market returns. However, unlike existing studies, we do not consider future returns, since investors do not observe them when making investment decisions. Thus, we feel it is more appropriate to consider expected market returns. We construct the expected market returns by running an AR model and considering the available public information about the macro-economy. The relationship is analysed under different conditions, considering a variety of different mutual fund flow measures, and considering (or not) the sensitivity of mutual fund flows to positive and negative market returns. We also propose different controls for the traditional timing models, and we further analyse the reverse-causality problem. The study demonstrates, for a sample of equity mutual funds registered for sale in the USA, that the poor market timing performance found in this and other prior studies can be completely attributed to the perverse effect of the fund managers’ liquidity service.     

The dynamics between stock returns and mutual fund flows: empirical evidence from the Greek market

This paper examines the interaction between mutual fund flows and stock returns in Greece. Specifically, we investigate the possibility of a causality mechanism through which mutual funds flows may affect stock returns and vice versa. The statistical evidence derived from the error correction model indicates that there is a bidirectional causality between mutual fund flows and stock returns. Cointegration results show that mutual funds flows cause stock returns to rise or fall. This may be explained by the fact that, in Greece, equity mutual funds are obliged by law to invest a certain percentage of their cash in stocks. Thus, inflows and outflows of cash in equity funds seem to cause higher and lower stock returns in Greek stock market.