1) The document analyzes what determines investors' purchases and redemptions of funds by examining the relationship between past fund performance, risk, fees, and fund flows. 2) Regression analyses show that fund flows are strongly related to past returns, with this influence being clearer for investor flows than money flows. Risk also negatively impacts inflows. 3) Management and custodial fees negatively affect investment flows, while larger fund size is inversely related to flows. The findings suggest investors are sensitive to short-term past performance in their decisions.

1. Metodología avanzada en
valoración financiera (61416)
What determines investors’ purchases
investors
and redemptions?
Profesores:
José Luis Sarto jlsarto@unizar.es
Laura Andreu landreu@unizar.es
Blog:
Bl
http://asignaturajls13-14.blogspot.com/
htt // i
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2. Motivation
 The increasing importance of research on fund flow
determinants: with our d t we can separate b i and
d t
i t
ith
data,
t buying d
selling behaviour
 The analysis of the asymmetrical responses of investors,
especially with respect t past performance
i ll ith
t to
t
f
 The possible effect of fund characteristics such as fees,
size and risk

3. Data
 Domestic equity funds (CNMV)





Return data
Number of investors and TNA
Inflows and outflows (money and investors)
Management fees
Monthly data from June 1999-December 2006
 Database free of survivorship bias

4. Methodology (I)
FLOW MEASURES
 Exact inflows and outflows
 Implied flows (to compare)
IPMFi ,t  j 
IPIFi ,t  j 
TNAi ,t  j  TNAi ,t (1  Ri ,t  j )  MGTNAi ,t  j
TNAi ,t
I i ,t  j  I i ,t  MGI i ,t  j
I i ,t

5. Methodology (II)
DETERMINANT - FLOW RELATIONSHIP (I)
 I di id l ti
Individual time-series regressions ( t
i
i
(return & risk)
i k)
Flowi ,t  j      Ri ,t  h   i ,t  j
Flowi ,t  j      Risk i ,t  h   i ,t  j
Past information (h): 3, 12 and 24 month
f
Reaction period (j):
1, 2 and 3 months

6. Methodology (III)
DETERMINANT - FLOW RELATIONSHIP (II)
 Pool regressions
(including the other variables)
Flowi ,t  j  f ( Ri ,t  h , Riski ,t  h , Feesi ,t  h ,
TOTFlowt  j , LogTNAi ,t  h )

7. Results (I)
Return-flow relationship
 Investment flows are strongly related to past
return
 This influence is higher considering exact
flows
 This relation is clearer for investor flows

8. Results (I)
Return-flow relationship
 Investment flows are strongly related to past return
l
l
l d
 This influence is higher considering exact flows
 This relation is clearer for investor flows
Table 2 Panel B: 12-month ret rn
2.
12 month return
+ (%)
Flow1
Flow2
Flow3
sign + (%)
PIF (I)
58
16
(63%)
(17%)
53
17
(58%)
(19%)
48
16
(52%)
(18%)
R2
5.3%
6.3%
7.0%
+ (%)
sign + (%)
PIF (In)
82
58
(89%)
(63%)
79
58
(87%)
(64%)
78
57
(86%)
(63%)
R2
18.9%
21.3%
22.1%
+ (%)
sign + (%)
PIF (Out)
82
51
(89%)
(55%)
81
51
(89%)
(56%)
80
51
(88%)
(56%)
R2
13.7%
17.6%
20.1%

9. Results (II)
Risk-flow relationship
 Risk has a negative effect on exact inflows
 This relation is clearer for investor flows
 Again, exact flows provide better results

10. Results (II)
Risk-flow relationship
 Risk h a negative effect on exact i l
i k has
i
inflows
 This relation is clearer for investor flows
 Again, exact flows provide better results
Table 3 Panel A: 3 month risk
3.
3-month
‐ (%)
Flow1
Flow2
Flow3
sign ‐ (%)
PIF (I)
50
15
(46%)
(14%)
45
14
(44%)
(13%)
44
14
(42%)
(13%)
R2
5.5%
7.4%
7.6%
‐ (%)
sign ‐ (%)
PIF (In)
91
58
(83%)
(53%)
90
60
(83%)
(55%)
86
57
(81%)
(54%)
R2
9.1%
9.7%
13.3%
‐ (%)
sign ‐ (%)
PIF (Out)
91
57
(83%)
(52%)
93
56
(85%)
(51%)
92
55
(87%)
(52%)
R2
9.1%
13.7%
16.1%

11. Results (III)
(
)
Pool regressions
 A total of 162 pool regressions
 Clearer findings when we analyse exact inflows
 Management and custodial fees have a negative
effect on investment flows
 Size is also inversely related to investment flows

12. Concluding remarks (I)
 Global evidence of the influence of past returns
on subsequent investment flows
 This finding is more evident when we examine
inflows
 Investor flows are more sensitive than money
flows
 Investors seem to take their decisions
considering short-term past information

13. Concluding remarks (II)
 Risk is also revealed as a decisive factor to
explain purchases
 Managements and custodial fees
negative effect on investment flows
have
a
 Size is also inversely related to investment flows

14. Metodología avanzada en
valoración financiera (61416)
What determines investors’ purchases
investors
and redemptions?
Profesores:
José Luis Sarto jlsarto@unizar.es
Laura Andreu landreu@unizar.es
Blog:
Bl
http://asignaturajls13-14.blogspot.com/
htt // i
t
jl 13 14 bl
t
/