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


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.


International capital flows International mutual funds 


  1. Adler, M. and B. Dumas. 1983. “International portfolio choices and corporation finance: A synthesis.” Journal of Finance 38, 925–984.CrossRefGoogle Scholar
  2. Bailey, W., A. Kumar, and D. Ng. 2008. “Foreign investments of U.S. individual investors: causes and consequences.” Management Science 54, 443–459.CrossRefGoogle Scholar
  3. Barber, B. M. and T. Odean. 2000. “Trading is hazardous to your wealth: the common stock investment performance of individual investors.” Journal of Finance 55, 773–806.CrossRefGoogle Scholar
  4. Barber, B. M., T. Odean, and L. Zheng. 2005. “Out of sight, out of mind: the effects of expenses on mutual fund flows.” Journal of Business 78, 2095–2119.CrossRefGoogle Scholar
  5. Bekaert, G. and C. Harvey. 2000. “Capital flows and the behavior of emerging market equity returns,” with Geert Bekaert,’ in Capital inflows to emerging markets, S. Edwards (Ed.). NBER and University of Chicago Press, Chicago, pp. 159–194.Google Scholar
  6. Berk, J. and R. C. Green. 2004. “Mutual fund flows and performance in rational markets.” Journal of Political Economy 112, 1269–1295.CrossRefGoogle Scholar
  7. Bhattacharya, U. and P. Groznik. 2008. “Melting pot or salad bowl: some evidence from U.S. investments abroad.” Journal of Financial Markets 11(3), 228–258.CrossRefGoogle Scholar
  8. Bohn, H. and L. Tesar. 1996. “U.S. equity investment in foreign markets: portfolio rebalancing or return chasing?” American Economic Review 86, 77–81.Google Scholar
  9. Brennan, M. and H. Cao. 1997. “International portfolio investment flows.” Journal of Finance 52, 1851–1880CrossRefGoogle Scholar
  10. Carhart, M. M. 1997. “On persistence in mutual fund performance.” Journal of Finance 52, 57–82.CrossRefGoogle Scholar
  11. Chevalier, J. and G. Ellison. 1997. “Risk taking by mutual funds as a response to incentives.” Journal of Political Economy 105, 1167–1200.CrossRefGoogle Scholar
  12. De Santis G. and B. Gerard. 1997. “International asset pricing and portfolio diversification with time-varying risk.” Journal of Finance 52, 1881–1912.Google Scholar
  13. Errunza, V. R. and E. Losq. 1989. “Capital flow controls, international asset pricing, and investors’ welfare: a multi-country framework.” Journal of Finance 44, 1025–1037.CrossRefGoogle Scholar
  14. Errunza, V., K. Hogan, and M.-W. Hung. 1999. “Can the gains from international diversification be achieved without trading abroad.” Journal of Finance 54, 2075–2107.CrossRefGoogle Scholar
  15. French, K. and J. Poterba. 1991. “Investor diversification and international equity markets.” American Economic Review 81, 222–226.Google Scholar
  16. Froot, K. A., P. G. J. O’Connell, and M. S. Seasholes. 2001. “The portfolio flows of international investors.” Journal of Financial Economics 59, 151–194.CrossRefGoogle Scholar
  17. Grinblatt, M. and M. Keloharju. 2000. “The investment behavior and performance of various investor types: a study of Finland’s unique data set.” Journal of Financial Economics 55, 43–67.CrossRefGoogle Scholar
  18. Gruber, M. J. 1996. “Another puzzle: the growth in actively managed mutual funds.” Journal of Finance 51, 783–810.CrossRefGoogle Scholar
  19. Khorana, A. and H. Servaes. 1999. “The determinants of mutual fund starts.” Review of Financial Studies 12(5), 1043–1074.CrossRefGoogle Scholar
  20. Levy, H. and M. Sarnat. 1970. “International diversification of investment portfolios.” American Economic Review 60, 668–675.Google Scholar
  21. Nanda, V., Z. Jay Wang, and L. Zheng. 2004. “Family values and the star phenomenon.” Review of Financial Studies 17, 667–698.Google Scholar
  22. Patel, J., R. J. Zeckhauser, and D. Hendricks. 1994. “Investment flows and performance: evidence from mutual funds, cross-border investments, and new issues,” in Japan, Europe and the international financial markets: analytical and empirical perspectives, R. Satl, R. Levitch and R. Ramachandran (Eds.). Cambridge University Press, New York, pp. 51–72.Google Scholar
  23. Sirri, E. R. and P. Tufano. 1998. “Costly search and mutual fund flows.” Journal of Finance 53, 1589–1622CrossRefGoogle Scholar
  24. Solnik, B. 2004. International investments, Pearson-Addison Wesley, Salt Lake City.Google Scholar
  25. Stulz, R. M. 1999. “International portfolio flows and security markets,” in International capital flows, M. Feldstein (Ed.). University of Chicago Press, Chicago.Google Scholar
  26. Tesar, L. and Werner, I. 1994. “International equity transactions and U.S. portfolio choice.” in The internationalization of equity markets, J. Frankel (Ed.). University of Chicago Press, Chicago, pp. 185–220.Google Scholar
  27. Tesar, L. and I. Werner. 1995. “U.S. equity investment in emerging stock markets.” World Bank Economic Review 9, 109–130.CrossRefGoogle Scholar
  28. Wermers, R. 2000. “Mutual fund performance: an empirical decomposition into stock-picking talent, style, transaction costs, and expenses.” Journal of Finance 55, 1655–1695.CrossRefGoogle Scholar
  29. Wooldridge, J. M. 2002. Econometric analysis of cross section and panel data, MIT Press, Cambridge, MA.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Risk Analysis DivisionOffice of the Comptroller of the Currency (OCC)WashingtonUSA

Personalised recommendations