Capital Flows: the Role of Fund Manager Portfolio Reallocation
38 Pages Posted: 12 Nov 2020
Date Written: July 2020
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
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