Determinants of Flows into U.S.-Based International Mutual Funds

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Abstract

The last few decades has witnessed a dramatic growth of U.S.-based mutual funds that invest in non-U.S. stock markets. This paper provides a comprehensive analysis of flows into these international mutual funds for 1970–2003. Our analysis uncovers several new facts about mutual fund flows. First, the empirical findings show a strong relationship between flows into U.S.-based international mutual funds and the correlation between the returns of the fund’s assets and the returns of the U.S. market, consistent with investors’ desire for international diversification. Furthermore, a stronger flow-performance relationship is observed when these correlations are low. As expected, the flows are lower when the volatility of the fund is higher. Second, the flows are related to contemporaneous and past fund returns supporting an “information asymmetry” as well as “return chasing” hypothesis for international capital flows.