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Mutual Fund Flows

Paper Session

Saturday, Jan. 6, 2024 10:15 AM - 12:15 PM (CST)

Marriott Rivercenter, Grand Ballroom Salon I
Hosted By: American Finance Association
  • Chair: Clemens Sialm, University of Texas-Austin

Financial Product Incentives to Differentiate: Evidence from Mutual Funds

Maxime Bonelli
,
London Business School
Anastasia Buyalskaya
,
HEC Paris
Tianhao Yao
,
Singapore - Management University

Abstract

We study the incentives of financial products to differentiate beyond performance, using mutual funds as our laboratory. We provide evidence consistent with product differentiation, reflected in fund prospectuses, enabling low-performing funds to compete for customers and charge higher fees by offering more niche products. Exploiting the issuance of Morningstar rating as a shock to perceived quality, we establish a causal link between low quality and increased differentiation. Funds receiving a low rating actively change their prospectus, increasing their product differentiation, which improves their survival likelihood. Much like other consumer products, mutual funds strategically pursue product differentiation to soften quality-based competition.

Institutional Synergies and the Fragility of Loan Funds

Mustafa Emin
,
Tulane University
Christopher James
,
University of Florida
Tao Li
,
University of Florida
Jing Lu
,
University of Florida

Abstract

There are two major institutional investors in the syndicated loan market: collateralized loan obligations (CLOs) and bank loan mutual funds. CLOs are closed-end funds while bank loan mutual funds are open-end funds that issue claims that are redeemable on demand. In this paper, we examine whether CLOs provide arbitrage capital that contributes to the resilience of loan funds. We find that CLOs provide liquidity through par building trades when loan funds experience large outflows. CLO-provided liquidity limits redemption-induced fire-sale discounts but only for loans that are par build eligible.

“Buy the Rumor, Sell the News”: Liquidity Provision by Bond Funds Following Corporate News Events

Alan Huang
,
University of Waterloo
Russell Wermers
,
University of Maryland
Jinming Xue
,
Southern Methodist University

Abstract

Using a comprehensive database of corporate news, we find that bond funds trade against the direction of news sentiment. The trading against news phenomenon is concentrated in funds selling on positive news and in the post-financial crisis period when dealer liquidity provision is constrained. Funds in so doing exhibit higher alphas, and a potential source of such alphas is bond price reversals post news events. Our findings highlight that bond mutual funds represent a significant liquidity provider in the corporate bond market and play a complementary role to dealers in corporate news events.

Stock Demand and Price Impact of 401(k) Plans

Riccardo Sabbatucci
,
Stockholm School of Economics
Andrea Tamoni
,
Rutgers University
Song Xiao
,
London School of Economics and Political Science

Abstract

We estimate a demand system linking 401(k) plans ownership of individual stocks and funds to their demand for equities, and quantify the effect of 401(k) assets on fund managers’ investment behavior. We find that 401(k) fund and stock ownership are the most important variables, after size, explaining fund demand for stocks, with a one standard deviation increase in 401(k) ownership leading to 15-30% increase in stock demand. Funds managing a larger fraction of 401(k) assets tilt their portfolios toward winners, high beta and long duration stocks, outperforming their benchmarks. This investment behavior has important implications for security pricing and generate a feedback effect if pension flows respond positively to relative fund returns. Lastly, we estimate the equilibrium price impact of a change in 401(k) ownership to be positive and increasing over time, consistent with the shift from active to passive investing.

Discussant(s)
Simona Abis
,
Columbia University
Victoria Ivashina
,
Harvard University
Jennie Bai
,
Georgetown University
Lukas Schmid
,
University of Southern California
JEL Classifications
  • G1 - General Financial Markets