Dynamics of Mutual Fund Flows and Returns : Investor Preferences and Performance Persistence

While previous papers mostly used the U.S. and U.K. data, we applied an international dataset to examine the flow–performance relationship of international equity and bond mutual funds. By incorporating a novel measure of asset managers’ market timing ability, drawn from the logic of counting model, from one side we evaluated the role of performance persistence in the flow–return relationship, and from the other side - how investor preferences mitigate this relationship. Firstly, we observed that the relationship between return and flows is influenced by the manager’s market timing ability in the meaning of a short-term price pressure effect. Secondly, by using various asset types to deal with investor preferences, statistical results demonstrate no substantial differences in investor behavior for both relationships between returns and flows and vice-versa, while some different pattern does emerge when considering investment style. Therefore, it looks like investors show strong friction to change their strategy in the short-term. Baseline result still hold when considering a turmoil period