Mutual funds and market performance: New evidence from ASEAN markets

ABSTRACT

The contemporaneous growth in ASEAN financial markets over the last two decades raises empirical questions regarding the role of institutional investors in financial market performance. Our study examines the dynamic relationship of aggregate mutual fund flows with market performance variables, i.e. stock market returns and volatility in ASEAN financial markets. Findings suggest that equity and balanced flows have a positive (negative) relationship with market returns (volatility), whereas bond and money market flows have a negative (positive) linkage with market returns (volatility). Furthermore, equity and balanced mutual funds contribute towards reducing market volatility. In addition, mutual funds respond concurrently to risk-related information as compared to returns-related information in the stock market. We also identify that risky securities have a stronger relationship with the market variables than less risky securities do. Moreover, investors direct flows away from equity-based funds to fixed income-type funds in times of high market risk.

KEYWORDS:

• Mutual funds
• market returns
• market volatility
• ASEAN

Acknowledgments

We are thankful to the editors of the Investment Analysts Journal, the anonymous referees, Abdul Ghafoor, Habib Hussain Khan, Dr Ijaz Ur Rahman, Saba Qureshi and Penny Ann McKeon for their encouragement and insightful comments.

Notes

1. Studies such as Fant (1999), Warther (1995) and Ben-Rephael, Kandel, and Wohl (2012).

2. Studies such as Poon and Taylor (1992), Duffee (1995), De Santis and İmrohoroğlu (1997) and Adrian and Rosenberg (2008).

3. A few studies exist on pension funds and market volatility on the macro-level; for example Thomas, Spataro, and Mathew (2014).

4. For example, Sirri and Tufano (1998), Jain and Wu (2000), Lynch and Musto (2003), and D’Arcangelis and Rotundo (2015), among others.

5. See, for example, Daigler and Wiley (1999), Kaniel, Saar, and Titman (2008) and Sias (1996).

6. See, for example, Klemkosky (1977), De Long, Shleifer, Summers, and Waldmann (1990), Nofsinger and Sias (1999) and Sias (2004).

7. See Figure 1 and Figure 2. Figure 1 shows the growth trend of mutual funds in Asian economies. Figure 2 shows the double-digit growth of mutual funds along with other regions of the world. Figure A1-5 and Figure A6-10 show data of assets under management (AuM) of mutual funds relative to stock market capitalisation and bond market capitalisation, to better gauge the mutual fund industry growth of each country. We are grateful to an anonymous source for this valuable insight.

8. Details of total number of funds of each country are given in Table A1.

9. We are most grateful to an anonymous source for suggesting the GARCH model in calculating volatility.

10. Wooldridge (2001) state that GMM is feasible for estimating interesting extensions of the basic unobserved effects model; for example, models where unobserved heterogeneity interacts with observed covariates.

11. To avoid the problem of mean-differencing procedures to eliminate fixed effects, the Helmert procedure transformation is used to estimate coefficients by GMM. For a detailed discussion, see Arellano and Bover (1995) and Love and Zicchino (2006).

12. Stock market index data includes the Jakarta Stock Exchange Composite Index, the FTSE Bursa Malaysia Kuala Lumpur Composite Index, the Philippines Stock Exchange Composite Index, the Stock Exchange of Thailand Index and the Strait Times Index.

13. A moderate investment approach entails a higher equity component in the mix of securities by balanced funds/hybrid funds. An opposite investment strategy is a conservative investment approach, which implies a higher fixed-income component in hybrid securities.

14. Klapper et al. (2004) find that developing economies have poor information mechanisms and are found to have high information asymmetries. Because of this, it is possible that mutual funds may be not able to make rational, contemporaneous decisions, due to abrupt volatility in stock markets.

15. This is what we observe in Table 5, that there exists a positive concurrent association of flows and market volatility. However, a negative relationship is observed in the next period, in the case of equity and balanced flows.

16. We are thankful to an anonymous source for the guidance.