Cash Holdings and the Performance of European Mutual Funds

Abstract

We investigate the determinants and performance implications of cash holdings for a large sample of actively-managed equity funds domiciled in the European Union (EU). In line with recent evidence from the US, we observe that cash holdings are strongly influenced by a fund's fee structure, past flows and flow volatility, and a fund's investment strategy. EU Funds with cash holdings in excess of the level predicted by fund attributes (i.e., high abnormal cash funds) outperform their low abnormal cash peers by risk-adjusted 0.96% per annum.

Making a Difference: European Mutual Funds Distinctiveness and Peers’ Performance

“…Third, we embrace nearly two decades of European data and covers both crisis and post-crisis periods. To our knowledge, the most comparable databases are used in Banegas et al (2013) and Graef, Vogt, Vonhoff and Weigert (2018) who also cover the European segment of the mutual funds industry. We can also add to these studies the research of Ferreira et al (2013) which provide a worldwide analysis of mutual funds.…”

“…In their analysis, European domiciled mutual funds account for 4438 funds over 12,577 mutual funds in total and observations span from 1997 to 2007. Graef et al (2018)…”

Holding cash for the better decision? A comparison study of the liquidity management between China and US mutual funds

“…In addition, in 2015, some equity funds in China changed their names to allocation funds to avoid the 80% equity allocation limits on policies. It indicates that cash holdings that directly reveal the asset allocation proportions of fund managers should be an important signal for investors as this can reflect management skills (Simutin, 2013;Graef et al, 2018) [39] [22] .…”

“…On the other hand, fund managers can benefit from the flexibility that holding cash offers, allowing better decisions, accommodating fund flows and controlling transaction costs (Simutin, 2013) [39] . I follow Simutin (2013) [39] and Greaf et al (2018) [22] and define abnormal cash holdings (ACH) as residuals by regressing cash holdings on multiple determinants. R-squared decomposition is applied to examine the relative importance of cash determinants.…”

“…My study contributes to three strands of the literature. First, there is a growing number of researchers studying the determinants of mutual fund cash holdings and liquidity management (Edelen, 1999;Yan, 2006;Brunnermeier and Pedersen, 2009;Simutin, 2013;Hanouna et al, 2015;Graef et al, 2018) [16] [43] [6] [39] [24] [22] . Moreover, there is extensive literature studying corporate cash holdings (Opler et al, 1999;Dittmar et al, 2003;Dittmar and Smith, 2007;Fresard, 2010) [34] [14] [15] [20] .…”