Capital Flows: the Role of Fund Manager Portfolio Reallocation

38 Pages Posted: 12 Nov 2020

See all articles by G. Bush

G. Bush

Banco de Mexico

Carlos Cañón

Banco de México

Daniel Gray

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

Abstract

Global open-ended mutual funds are an increasingly important source of capital for emerging market economies (EMEs). Mutual funds, however, have a greater propensity than other overseas investors to change their holdings of EME bonds following changes in macroeconomic conditions. This paper considers why. We use a novel methodology – underpinned by data on individual security holdings – to distinguish between the two reasons why a fund's holdings of EME bonds might change: (i) the amount invested in the fund changes and (ii) the fund manager changes its portfolio allocations. We find that funds' responsiveness to changes in global macroeconomic conditions - "push factors'' - is explained by investor flow decisions. Conversely, funds' responsiveness to changes in local macroeconomic conditions – "pull factors'' – is explained by manager reallocation decisions. We also identify other institutional factors which impact reallocation decisions: changes in their leverage, changes to their benchmark, and changes in risk appetite (funds reallocate towards safer EMEs when global risk increases).

Keywords: mutual funds, capital flows, emerging markets, portfolio allocation

JEL Classification: F32, G11, G15, G23

Suggested Citation

Bush, Georgia R. and Cañón, Carlos and Gray, Daniel, Capital Flows: the Role of Fund Manager Portfolio Reallocation (July 2020). Available at SSRN: https://ssrn.com/abstract=3697664 or http://dx.doi.org/10.2139/ssrn.3697664

Georgia R. Bush (Contact Author)

Banco de Mexico ( email )

Ave Cinco e Mayo 1
Col. Centro
Mexico City, Mexico DF 06059
Mexico

Carlos Cañón

Banco de México ( email )

Av. 5 de Mayo No. 6
Col. Centro, Deleg. Cuauhtémoc
Ciudad de México, DF, 06059
Mexico

Daniel Gray

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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