Bachelor Thesis from the year 2017 in the subject Business economics - Investment and Finance, grade: 1.3, University of Frankfurt (Main), language: English, abstract: This bachelor thesis investigates different determinants for absolute and relative fund flows in socially responsible investment (SRI) funds and conventional funds on the German Market. My multivariate analyses study the flow performance relationship, but also incorporate persistence in flows, expenses and typical fund characteristics such as age, total net assets and number of share classes. I find a high dependency of flows on prior returns from funds known as a return chasing behaviour. My model shows different flow-performance relations depending on the kind of sustainability fund and how the perception of investors changed over time towards being more sensitive regarding SRI criteria. Most importantly there exists a strong momentum effect for funds shown with persistent flows in Germany over different periods of time.

This dissertation contributes to two recent debates in the mutual fund literature: The impact of sustainability on mutual fund flows and the connection between fund activeness and mutual fund performance. In March 2016, Morningstar, one of the leading information providers in the mutual fund industry, introduced its mutual fund Sustainability Rating. The Rating provides investors with an easy-to-understand measure to identify funds that invest in accordance with high environmental, social, and governance standards. Chapter 1 investigates the effect of this Rating on mutual fund flows. An average high-rated retail fund receives up to USD 10.1 million higher net flows and an average low-rated retail fund suffers from up to USD 3.5 million lower net flows than an average-rated fund during the first year after the publication of the Rating. This result stresses the importance of sustainability as an investment criterion and the impact of the Sustainability Rating as a source of information to private investors. Chapters 2 through 4 examine whether the trading activity of a fund manager or fund activeness, that is the deviation of a fund portfolio from its benchmark, is linked to future performance. The fund literature has identified various activity measures that can predict fund returns. Chapter 2 shows that two of the most important measures, Active Share and the R2 selectivity measure, have not been good predictors after 2003 when controlling for different benchmark indices and alternative risk factors. Chapter 3 examines the investment performance of funds whose exposures to the risk factors of the Carhart model vary significantly over time. The analysis shows that funds with volatile factor weights achieve on average lower returns than funds with stable factor exposures. After testing for alternative explanations, this result provides evidence that fund managers fail to time risk factors. This finding also contributes to the current debate on whether risk factors can be timed. Chapter 4 addresses the question whether fund managers trade more in times of large market mispricing and, therefore, whether fund turnover is positively correlated to the subsequent fund performance. The results confirm respective findings from earlier research for an international mutual fund sample. They additionally show that this turnover-performance relationship is particularly strong in countries with highly skilled fund managers, who trade more in times of high market opportunities. Furthermore, the effect is stronger in markets with a low performance persistence.

How to prevent runs on open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds’ net asset values to pass on funds’ trading costs to transacting shareholders. Using unique data on investor transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces redemptions during stress periods. The positive impact of alternative pricing rules on fund flows reverses in calm periods when costs associated with higher tracking error dominate the pricing effect.

I investigate mutual fund flows at the individual fund and at the fund family level. At the individual, I use SEC filings to decompose fund flows into inflows and outflows. This decomposition of net flows into its component parts provides a way to examine differences in how search costs and investor learning affect investors who are entering a fund (or adding to their investments) versus those investors who are leaving a fund (or decreasing their investments). I then examine the effect of the existence of an advertisement for the fund on these investors. At the mutual fund family level, I examine how the characteristics and performance of mutual fund families affect the flows to the family as a whole. I then examine the effects of advertising expenditures on flows to the fund family.