Does Stock Return Momentum Explain the “Smart Money” Effect?

Sapp, Travis; Tiwari, Ashish

doi:10.1111/j.1540-6261.2004.00710.x

Cited by 285 publications

(202 citation statements)

References 35 publications

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“…Tal aponta, portanto, para a existência do efeito momentum, ou seja, para a preferência por fundos que obtiveram bons resultados no passado recente. A sensibilidade ao desempenho recente dos fundos é consistente com os resultados obtidos em outros estudos (e.g., Gruber, 1996;Tiwari, 2004).…”

Section: Teste De Causalidade De Grangerunclassified

“…Em segundo lugar, o presente estudo é um dos poucos que utilizam dados com frequência mensal; a maioria dos estudos sobre o tema recorre a dados com frequência mais baixa, sejam dados com frequência trimestral (e.g., Tiwari, 2004;Bu;Lacey, 2008), sejam dados com frequência até mesmo anual (e.g., Marzuki;Worthington, 2011). A escolha da frequência dos dados pode parecer uma questão técnica com reduzida importância, mas, na verdade, pode ter implicações substanciais.…”

Section: Introductionunclassified

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O efeito de smart money nos fundos de investimento: o caso português

Lobão

Oliveira

2017

Nova econ.

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ResumoCódigos JEL G11; G15; G17; G20; G23. Júlio LobãoUniversidade do Porto Miguel OliveiraUniversidade do Porto AbstractIn this article we analyze the investors' ability to select mutual funds, a phenomenon that is known as the smart money effect. The sample used concerns funds domiciled in Portugal for the 2003-2011 period. The empirical evidence suggests that investors had good skills when selecting mutual funds. When the market is in an upward (downward) phase, investors have the ability to select the funds in which to invest (disinvest) but they do not show the ability to choose the best funds to sell (buy). The intensity of the smart money effect seems also to depend on fund category and on the size of the funds.Keywords smart money effect; mutual funds; fi nancial markets effi ciency; Portugal.JEL Codes G11; G15; G17; G20; G23. O efeito de smart money nos fundos de investimento: o caso portuguêsThe smart money effect in mutual funds: the Portuguese case

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Section: Teste De Causalidade De Grangerunclassified

Section: Introductionunclassified

O efeito de smart money nos fundos de investimento: o caso português

Lobão

Oliveira

2017

Nova econ.

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“…Or put differently, is ethical money financially smart? A number of studies on conventional mutual funds document a 'smart money' effect where money-flows can predict shortterm fund performance (Gruber, 1996;Zheng, 1999), while Sapp and Tiwari (2004) show that this effect can be explained by the momentum effect of stock returns. In contrast to the smart money effect, Frazzini and Lamont (2005) document a 'dumb money' effect where individual investors invest their money in mutual funds which own stocks that perform poorly over subsequent years.…”

Section: Money-flows and Future Performancementioning

confidence: 99%

Is Ethical Money Financially Smart?

2006

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Little is known about how investors select socially responsible investment (SRI) funds. Investors in SRI funds may care more about social or ethical issues in their investment decisions than about fund performance. This paper studies the money-flows into and out of the SRI funds around the world.We find that ethical money chases past returns. In contrast to conventional funds' investors, SRI investors care less about the funds' riskiness and fees. Funds characterized by shareholder activism and by in-house SRI research attract more stable investors. Membership of a large SRI fund family creates higher flow volatility due to the lower fees to reallocate money within the fund family. SRI funds receiving most of the money-inflows perform worse in the future, which is consistent with theories of decreasing returns to scale in the mutual fund industry. Finally, funds employing a higher number of SRI screens to model their investment universe receive larger money-inflows and perform better in the future than focused funds.Keywords: money-flows, ethical funds, socially responsible investing, persistence in performance, investment screens, corporate governance screens, SRI JEL classification: G10 and G19 2 "Invest with your brain and heart. Invest for our planet… The Funds give investors the ability to unite their financial goals with environmental progress" --from the prospectus of Sierra Club Funds Particular to the socially responsible investment (SRI) funds, often also more narrowly called ethical funds, is that both financial goals and social objectives are pursued. Over the past decade, these SRI funds experienced a tremendous growth in most developed economies around the world. 1 SRI comprises assets under management worth $2.1 trillion, representing approximately 11% of the total assets under professional management in the US (Social Investment Forum, 2003). 2 This paper studies the money-flows into and out of the SRI mutual funds around the world.Some recent studies on the behavior of investors in mutual funds show that both financial and nonfinancial fund attributes affect the choice of a particular mutual fund or hedge fund. Risk-adjusted as well as raw past performance significantly affect the money-flows of mutual funds (see, e.g. , 1997;Goetzmann and Peles, 1997;Sirri and Tufano, 1998;Del Guercio and Tkac, 2002). While the top performing mutual funds attract most of the inflows, the weakly performing funds are hardly affected by outflows. This indicates that once money is invested, it tends to be rather sticky (Gruber, 1996). Furthermore, non-financial attributes like mutual fund visibility (Sirri and Tufano, 1998) In spite of the fact that SRI has become a multi-trillion dollar market, little is known about how investors select funds with explicit non-financial attributes. 3 Investors in SRI mutual funds may 1 The terms SRI funds and ethical funds are often used interchangeably, although strictly speaking ethical funds are a subset of SRI funds. The latter comprise funds whose investment univer...

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“…We will confirm this finding in this paper within a realistic market setting where clients switch between managers based on their after-fees performance. Indeed perhaps the most important contribution of this paper stems from the insights that we provide as to the impact that clients have on market pricing as a consequence of their typical behaviour of chasing investment performance (Sapp andTiwari, 2004, Bu andLacey, 2008). A second important insight that can be gleaned from this paper is the implications for market efficiency of the costs incurred (and so the fees charged) by managers pursuing different styles.…”

Section: Introductionmentioning

confidence: 99%

“…First, clients learn about unobservable manager ability only from their realised past fund performance. Starting with Gruber (1996), a branch of the mutual fund literature concentrated its attention on the existence of a smart money effect in markets (see Zheng, 1999 andSapp andTiwari, 2004), which refers to the investors' proclivity to identify superior managers based on their recent performance with the important consequence that funds flow from under-performing managers to out-performing managers. We decided to impound in our model this performance chasing behaviour of investors by incorporating a switching strategy for clients whereby they periodically reallocate their funds from the worst performing managers to the best performing manager.…”

Section: Introductionmentioning

confidence: 99%

The impact on the pricing process of costly active management and performance chasing clients

Bird

Casavecchia

Pellizzari

et al. 2011

J Econ Interact Coord

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One of the necessary features of markets to produce efficient pricing is competition between information-based investors who quickly impound new information into price. However, a significant proportion of funds invested in today's equity markets are in the hands of managers who pursue a style that utilises little or none of the available information. We simulate such a market where the funds are being managed using the following three investment styles: fundamental, momentum and index. We confirm that the major pricing anomalies that have been highlighted previously in the literature are a natural consequence of competition between managers utilising these three investment styles. More importantly, we show that this situation is unlikely to change as long as markets continue to be dominated by costly active managers with clients who pursue outperformance.

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Does Stock Return Momentum Explain the “Smart Money” Effect?

Cited by 285 publications

References 35 publications

O efeito de smart money nos fundos de investimento: o caso português

O efeito de smart money nos fundos de investimento: o caso português

Is Ethical Money Financially Smart?

The impact on the pricing process of costly active management and performance chasing clients

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