Seasonal Asset Allocation: Evidence from Mutual Fund Flows

Abstract:     
We explore U.S. mutual fund flows, finding strong evidence of seasonal reallocation across funds based on fund risk exposure. We show that substantial money moves from U.S. equity to U.S. money market and government bond mutual funds in autumn, then back to equity funds in spring, controlling for the influence of past performance, advertising, liquidity needs, capital gains overhang, and year-end influences on fund flows. We find strong correlation between U.S. mutual fund net flows (and within-fund-family exchanges) and a proxy for variation in investor risk aversion across the seasons. We find similar evidence in Canadian flows, and inflows from Australia where the seasons are six months out of phase relative to Canada and the U.S. While prior evidence regarding the influence of seasonally changing risk aversion on financial markets relies on seasonal patterns in asset returns, we provide the first direct trade-related evidence.

Number of Pages in PDF File: 114

Keywords: time-varying risk aversion, sentiment, mutual fund flow seasonality, net exchanges, net flows, risk tolerance, risk aversion

JEL Classification: G11

working papers series