A U-Shaped Flow-Performance Sensitivity Across the Globe

Abstract

Using a comprehensive sample of equity mutual funds from 23 countries, we document that the flow-performance sensitivity is greater for both top and bottom performance, compared to the middle. This “U-shaped” sensitivity is especially strong in down markets, for funds holding illiquid assets, and in the most recent decade. These results only hold over quarterly or yearly horizons, while at the three-year horizon the conventional convex flow-performance relationship prevails. Overall, our results are consistent with a first-mover advantage in redemptions after poor recent performance and the price impact externality of the manager’s forced sales.

Keywords: Mutual fund flows, flow-performance relationship, strategic complementarities, market states, illiquidity, performance horizon, forced sales

JEL Classification: G11, G12, G14, G15, G23