Mutual fund flow-performance dynamics under different market conditions in South Africa

Abstract

Questions regarding the specific factors that drive continuous cash allocations by investors into portfolios of actively managed funds, despite consistent underperformance, continue to remain an inexhaustive aspect of the literature that calls for further investigations. This study assesses the dynamic relationship between fund flow and performance of equity mutual funds in South Africa under different market conditions. The study employs a GMM technique to analyze the panel data of 52 South African equity mutual funds from 2006 to 2019. The analysis found that convexity is prevalent in the flow-performance relationship, where fund contributors in subsequent periods allocate recent underperforming and outperforming funds disproportionate cash. This finding is evident in the lack of significance in the past performance effects on subsequent fund flows. The study found that lagged fund flows, fund size, fund risk, and market risk drive subsequent fund flows under changing conditions of the general market and fund markets. Overall, it is posited that fund contributors and asset administrators adapt to prevailing market dynamics relative to trading decisions. As a result, this affirms the normative guidelines of the Adaptive Markets Hypothesis, leading to the conclusion that exogenous factors drive fluctuations in fund flows in South Africa.

Emerging market analysis of passive and active investing under bear and bull market conditions

“…We submit that this is a critical oversight, and it is a planned contribution of the current paper to correct this weakness. An exception is the limited South African literature that is closest to our investigation, namely, Bertolis and Hayes (2014), Malefo et al (2016), Kunjal et al (2021) and Apau et al (2021), but which differ from the current study in one important aspect. The empirical designs in these studies account for prevailing states of economy, but unlike the current paper they are benchmark outperformance studies and not explicitly investigating the passive versus active debate.…”

“…(2016), Kunjal et al . (2021) and Apau et al . (2021), but which differ from the current study in one important aspect.…”

Regime-Switching Determinants of Mutual Fund Performance in South Africa

“…These three variables (fund age, fund risk, and market risk) represent the set of fund-level and systemic determinants of cross-sectional differences in mutual fund performance under time-varying conditions of the market in South Africa. These results imply that exogenous factors drive fluctuations in the interactions between mutual fund flow and performance under timevarying market conditions in South Africa, and affirms the normative guidelines of the adaptive markets hypothesis as explained by Apau et al (2021) and Kunjal et al (2017).…”

The effect of performance manipulation on fund flows under different market conditions in South Africa

“…However, beyond outperformance, drivers of the flow-performance inconsistency may include performance manipulation through which fund managers adapt to changing market conditions to sustain the attraction of investors' cash, while manipulation strategies alter the efficient asset pricing mechanism of the financial system and allow arbitrageurs to achieve extraordinary returns. Evidence (S&P, 2019) suggests that in one-year, active fund portfolios in South Africa underperformed the market by 34.01 percent, underperformed it by 84.66 percent in three years, and trailed it significantly by 91.03 percent in five years (as cited in Apau et al, 2021a). In the period under review (2014-2018), the inflow of new cash from investors to fund managers increased significantly, with over R1.9 trillion worth of assets under administration as of the end of the third quarter of 2018, while the current combined assets of the fund industry stand more than R2.49 (ASISA, 2021; Rangongo, 2018) as cited in Apau et al (2021a).…”

“…Evidence (S&P, 2019) suggests that in one-year, active fund portfolios in South Africa underperformed the market by 34.01 percent, underperformed it by 84.66 percent in three years, and trailed it significantly by 91.03 percent in five years (as cited in Apau et al, 2021a). In the period under review (2014-2018), the inflow of new cash from investors to fund managers increased significantly, with over R1.9 trillion worth of assets under administration as of the end of the third quarter of 2018, while the current combined assets of the fund industry stand more than R2.49 (ASISA, 2021; Rangongo, 2018) as cited in Apau et al (2021a). The asymmetric flow-performance patterns in South Africa suggest that the dynamics of their interactions adapt to different market conditions and hence require nonlinear conditional modelling to obtain accurate inferences about their behavior.…”