Mutual Fund Investment in Emerging Markets: An Overview

37 Pages Posted: 5 Jun 2001

See all articles by Graciela Kaminsky

Graciela Kaminsky

National Bureau of Economic Research (NBER); George Washington University - Department of Economics

Richard K. Lyons

University of California, Berkeley; National Bureau of Economic Research (NBER)

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

Date Written: March 23, 2001

Abstract

How do mutual funds behave when they invest in emerging economies? For one thing, mutual funds' flows are not stable. Withdrawals from emerging markets during recent crises were large, which squares with existing evidence of financial contagion.

International mutual funds are one of the main channels for capital flows to emerging economies. Although mutual funds have become important contributors to financial market integration, little is known about their investment allocation and strategies. Kaminsky, Lyons, and Schmukler provide an overview of mutual fund activity in emerging markets.

First, they describe international mutual funds' relative size, asset allocation, and country allocation.

Second, they focus on fund behavior during crises, by analyzing data at the level of both investors and fund managers.

Among their findings: Equity investment in emerging markets has grown rapidly in the 1990s, much of it flowing through mutual funds. Collectively, these funds hold a sizable share of market capitalization in emerging economies. Asian and Latin American funds achieved the fastest growth, but are smaller than domestic U.S. funds and world funds.

When investing abroad, U.S. mutual funds invest more in equity than in bonds. World funds invest mainly in developed nations (Canada, Europe, Japan, and the United States). Ten percent of their investment is in Asia and Latin America. Mutual funds usually invest in a few countries within each region.

Mutual fund investment was very responsive to the crises of the 1990s. Withdrawals from emerging markets during recent crises were large, which squares with existing evidence of financial contagion.

Investments in Asian and Latin American mutual funds are volatile. Because redemptions and injections are large relative to total funds under management, funds' flows are not stable. The cash held by managers during injections and redemptions does not fluctuate significantly, so investors' actions are typically reflected in emerging market inflows and outflows.

This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to understand the operation of financial markets and the effects of financial globalization. The study was funded by the Bank's Research Support Budget under the research project "Mutual Funds in Emerging Markets." The authors may be contacted at graciela@gwu.edu, lyons@haas. berkeley.edu, or sschmukler@worldbank.org.

JEL Classification: F3, G1, G2

Suggested Citation

Kaminsky, Graciela and Lyons, Richard K. and Schmukler, Sergio, Mutual Fund Investment in Emerging Markets: An Overview (March 23, 2001). World Bank Policy Research Working Paper No. 2529. Available at SSRN: https://ssrn.com/abstract=271262

Graciela Kaminsky

National Bureau of Economic Research (NBER)

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George Washington University - Department of Economics ( email )

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HOME PAGE: http://www.gracielakaminsky.com/

Richard K. Lyons

University of California, Berkeley ( email )

Haas School of Business
Berkeley, CA 94720
United States
510-642-1059 (Phone)
510-643-1420 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sergio Schmukler (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

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