Mutual fund flows and investor returns: An empirical examination of fund investor timing ability

Abstract

We examine the timing ability of mutual fund investors using cash flow data at the individual fund level. Over 1991Over -2004, equity fund investor timing decisions reduce fund investor average returns by 1.56% annually. Underperformance due to poor timing is greater in load funds and funds with relatively large risk-adjusted returns. In particular, the magnitude of investor underperformance due to poor timing largely offsets the risk-adjusted alpha gains offered by good-performing funds. Investors in both actively managed funds and index funds exhibit poor investment timing. We demonstrate that our empirical results are consistent with investor return-chasing behavior.

Do Investment Flows Drive the Disposition Effect on Fund Managers?

“…Since this paper focuses on the relationship between flow pressure and DE, we need to control other factors, such as fund characteristics, policy, and fee structure, as these variables may influence the fund flows, and they are chosen due to their importance in the related literature. Friesen and Sapp (2007) found that the fund performance gap of timing ability positively correlates with fund size, while the relationship is not significant for small funds with relatively small managed assets. Wermers (2000) concluded that active funds with higher stock picking ability and higher turnover rate outperform than passive index funds.…”

“…Kacperczyk and Seru (2007) found that higher sensitivity of investors' holdings to changes in market information would reduce managerial skills. Friesen and Sapp (2007) use cash flow measurement for the timing ability of fund investor, found that these flow-motivated trading as a poor timing largely impair gains from good-performing funds. Coval and Stafford (2007) used mutual fund data to study how the flow pressure from extreme flow influences manager trading strategy, and they found that if there is a lack of corresponding demand for such stocks, the funds still suffer from fire-sale losses and the counter trading party is likely to have positive post-fire-sale abnormal returns.…”

“…Barber et al (2005) examined the relationship between fund characteristics and new money in a fund. In addition, Friesen and Sapp (2007) studied the plausible explanation for fund timing ability. Meanwhile, Wermers (2000) examined whether active funds with higher turnover rate can cover their transaction costs.…”

Gold stocks, the gold price and market timing

“…Initially, we follow the method of Friesen and Sapp 25 by using end of month data and assuming that all cash flows are discretely invested at the end of each monthly period. We then take advantage of the daily data available to calculate the money-weighted return assuming that all net cash flows occur discretely at the end of each day.…”

Do UK Retail Investors Buy at the Top and Sell at the Bottom?

“…to 2004 Friesen andSapp (2007) propose a methodology that identifies the average return experience of mutual fund investors. They propose and make use of a measure that they refer to as the 'performance gap' that compares the return available to a simple buy and hold strategy in a fund with the return a typical investor would achieve taking into account the timing of their investments into the fund and also their disinvestments from the fund.…”