The Determinants of the Flow of Funds of Managed Portfolios: Mutual Funds Versus Pension Funds

FRB Atlanta Working Paper 2000-21

47 Pages Posted: 3 Jun 1999

See all articles by Diane Del Guercio

Diane Del Guercio

University of Oregon, Lundquist College of Business; European Corporate Governance Institute (ECGI)

Paula A. Tkac

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Date Written: November 2000

Abstract

Due to differences in financial sophistication and agency relationships, we posit that investors use different criteria to select portfolio managers in the retail mutual fund and fiduciary pension fund industry segments. We provide evidence on investors' manager selection criteria by estimating the relation between manager asset flow and performance. We find that pension fund clients use quantitatively sophisticated measures like Jensen's alpha, tracking error, and outperformance of a market benchmark. Pension clients also punish poorly performing managers by withdrawing assets under management. In contrast, mutual fund investors use raw return performance and flock disproportionately to recent winners but do not withdraw assets from recent losers. Mutual fund manager flow is significantly positively related to Jensen's alpha, a seemingly anomalous result in light of a relatively unsophisticated mutual fund client base. We provide preliminary evidence, however, that this relation is driven by a high correlation between Jensen's alpha and widely available summary performance measures, such as Morningstar's star rating. By documenting differences in the flow-performance relation, we contribute to the growing literature linking fund manager behavior to the implicit incentives to increase assets under management. We show that several forces combine to weaken the incentive for pension fund managers to engage in the type of risk-shifting behavior identified in the mutual fund literature.

Keywords: Mutual funds, pension funds, fund flows, performance evaluation

JEL Classification: G23, G11, G10

Suggested Citation

Del Guercio, Diane and Tkac, Paula A., The Determinants of the Flow of Funds of Managed Portfolios: Mutual Funds Versus Pension Funds (November 2000). FRB Atlanta Working Paper 2000-21. Available at SSRN: https://ssrn.com/abstract=166431 or http://dx.doi.org/10.2139/ssrn.166431

Diane Del Guercio

University of Oregon, Lundquist College of Business ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-5179 (Phone)
541-346-3341 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Paula A. Tkac (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404-498-8813 (Phone)
404-498-8810 (Fax)

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