The impact of flow of funds and management style on abnormal performance

Abstract

This article analyses 1349 well-diversified, actively managed equity mutual funds across nine different categories from the period January 1992 to November 2011, based on the management style (active or passive), pursued by fund managers who receive new money as it flows (commonly known as flow of funds) into the mutual funds. Results of this research do not support, in totality, the results found in the existing literature. Abnormal performance does diminish following the excessive inflow of funds for large-cap funds; however, it increases for small-cap funds for the same phenomenon. I further evaluate abnormal performance based on active and passive style of fund management following the inflow and outflow of funds. Results of this study show mixed results. Although active management does improve the performance of a segment of equity funds, the improvement is not evident for all types of equity funds. Finally, this study also applies a portfolio approach, and results indicate that the impact of active management on a fund's abnormal performance is not homogeneous across winner and loser portfolios for the same type of funds.

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Correspondence to Abhay Kaushik.

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Kaushik, A. The impact of flow of funds and management style on abnormal performance. J Asset Manag 13, 327–338 (2012). https://doi.org/10.1057/jam.2012.13

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Keywords

  • performance of mutual funds
  • flow of funds
  • manager tenure
  • cash
  • investment in top 10 per cent assets