Return Chasing in Bond Funds

Abstract

Note: These graphs give the total net assets of all bonds with sufficient data in CRSP sample (Panel A) and the net cash flow to all bond funds (Panel B). The left axis presents the total dollar value in millions.

Are fund managers rewarded for taking cyclical risks?

“…The authors find evidence of return-chasing behaviour and evidence that aggregate flows into an asset class can affect market prices, creating a self-fulfilling cycle which can reverse following changes in investor sentiment. At the fund-level, Gruber (2011), Fulkerson et al (2013 and Chen and Qi (2017) examine the flow-performance relationship of US equity funds, bond funds and corporate bond funds respectively, including potential non-linearities, with the goal of assessing whether flows are "smart".…”

The Relation between Past Flows and Future Performance: Simple Investment Strategies in the Mutual Fund Sector

“…In addition, it defines relative flows under the assumption that all flows occur at the end of the month. 3 To avoid biases through extreme relative flows-for example from very small but fast growing new funds-I winsorize relative flows to a maximum of 100%. This way, the respective observation is still in the sample and still indicates a high inflow.…”

“…The relation is even more pronounced for equity funds. 3 Berk and Tonks [53] define relative flows under the assumption that fund flows occur at the beginning of the month. As in reality fund flows will be spread throughout the month, both assumptions are equally inferior estimates.…”

“…Within this area there is broad agreement with the fact that investors "chase performance" (e.g., Ivković and Weisbenner [1,2]; Fulkerson et al [3]; and public media, e.g., Clements [4]; Gaffen [5]; Israelsen [6]), meaning that fund investors reward superior past performance with new money inflows, while inferior performance is punished by money outflows (e.g., Ippolito [7]). Early studies document a convex, non-linear shape to this relation, showing that good performance leads to high flows of new money while bad performance produces only low outflows (e.g., Chevalier and Ellison [8]; Sirri and Tufano [9]; Del Guercio and Tkac [10]; Shrider [11]).…”

Brazilian Monetary Policy’s Influence on Investment Funds’ Allocation in Corporate Bonds

“…Moreover, even considering an international perspective, where there is more discussion about investment funds, little attention is paid to corporate bond funds (Fulkerson, Jordan & Riley, 2013;Moneta, 2015;Boukhatem, Ftiti & Sahut, 2020).…”