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The turn-of-the-year effect in mutual fund flows

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Abstract

The seasonal regularity in cash flows to mutual funds remains a puzzle. In line with Choi (J Appl Bus Res 31(2):715–726, 2015), who observes the seasonality in cash flows in the U.S. domestic mutual fund industry, we find that the month of January is characterized by the highest net flows, and December, the lowest. Considering that mutual fund traders usually implement their investment decisions during the turn-of-the-year period, this study investigates the potential causes of this seasonal regularity. The seasonal component of investors’ asset-allocation decisions is not associated with the seasonal variations in personal income growth and consumption growth. Instead, the tax treatment of the distribution from mutual funds is likely to drive this seasonal pattern. We also find strong evidence that past performance affects the seasonality in the cash flows of equity funds. The “January effect” in the inflow to mutual funds is stronger for the funds with higher past performance. Interestingly, investors are not sensitive to the past performance when they buy style funds, but they sell the funds with poorly performed styles at the turn of the year.

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Notes

  1. See, for example, Choi (2014a, 2014c), De Bondt and Thaler (1986), Fridson (2000), Jordan and Jordan (1991), Shim et al. (2015), and Sørensen (2002).

  2. See, for example, Branch (1977), Dyl (1977), Keim (1983), Reinganum (1983), Roll (1983), and Ritter (1988).

  3. We exclude international funds, natural resources funds, and index funds from our final sample.

  4. http://www.sec.gov/edgar.shtml.

  5. We conduct a robustness check by using various cutoffs of flows. However, the qualitative results are the same.

  6. In this study, we report the results using the value-weighted average flows to equity funds. We also rerun all the analyses with the equally weighted average flows and arrive at the same qualitative results.

  7. We rerun all the analyses over two subperiods, 1994–2004 and 2005–2014, and arrive at the same qualitative results. To save space, results over the entire sample period are reported in this article, but results over the subperiods are available upon request.

  8. We thank Kenneth French for making these data available. Data on the Fama–French three factors and the momentum factors were downloaded from the website of Professor K. French (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html). For further detailed calculations of factor returns, see Fama and French (1993) and Carhart (1997).

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Acknowledgements

This study extends the doctoral dissertation of the first author ("Three essays on stock market seasonality"), which was submitted to the College of Business at Georgia Institute of Technology in partial fulfillment of the requirements for the doctoral degree. We are grateful for the helpful comments and suggestions from Igor Loncarski, Hoon Cho, Cheol S. Eun, Qinghai Wang, Narayanan Jayaraman, Rehim Kilic, Suzanne Lee, and Jonathan Batten.

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Authors and Affiliations

  1. School of Business, Ewha Womans University, 52, Ewhayeodae-gil, Seodaemun-gu, Seoul, 03760, Republic of Korea

    Hyung-Suk Choi

  2. College of Economics, Sungkyunkwan University, 25-2, Sungkyunkwan-ro, Jongno-gu, Seoul, 03063, Republic of Korea

    Doojin Ryu

  3. College of Business, Korea Advanced Institute of Science and Technology, 85, Hoegi-ro, Dongdaemun-gu, Seoul, 02455, Republic of Korea

    Sangik Seok

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  1. Hyung-Suk Choi
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  2. Doojin Ryu
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  3. Sangik Seok
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Correspondence to Doojin Ryu.

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Choi, HS., Ryu, D. & Seok, S. The turn-of-the-year effect in mutual fund flows. Risk Manag 19, 131–157 (2017). https://doi.org/10.1057/s41283-017-0015-y

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