Chasing trend and losing money: open end mutual fund investors’ trading behaviour in Greece

Abstract

This study examines the trading behaviour of mutual fund investors, its medium-term profitability and its impact on the performance of individual funds. An important yet thinly investigated subject is examined under the prism of a small emerging stock market growing to maturity, during both a strong bull and a violent bear market. The findings of this study are insightful: Mutual fund investors do not chase past returns. The empirical evidence also suggests that they do not hunt past superior performance. However, they do seem to employ a current-performance momentum screen to pick their funds, while their trading behaviour doesn’t seem to affect the concurrent performance of the fund. Finally, it is claimed that mutual fund investors are perverse fund pickers. The suggested conclusion can only be that money is inefficiently invested in mutual funds.

Notes

¹ See Ferson and Schadt (1996), Edelen (1999).

² There is no other specialized study in the bidirectional relationship between flows and performance on the micro level. Edelen (1999) is the most complete study on how flows influence performance. Patel et al. (1990), Ippolito (1992) and Goetzmann and Peles (1997), Chevalier and Ellison (1997) and especially Sirri and Tufano (1998) as well as Barber et al. (2003) are all the recent studies that trace the impact of performance on flows mainly within the framework of the upward moving market of the 1990s.

³ The Greek financial system is oligopolistic. The largest and dominant retail banks completely control the biggest fund management companies and the most prominent investment banks. Moreover, stock market legislation most often lags already observed inefficiencies.

⁴ For all quotations on this unpublished working paper, the permission of the authors was namely taken. As a date for the paper, the final draft date was used.

⁵ Alphatrust has the most reliable mutual fund database in Greece, which the company also shares with the Association of Greek Institutional Investors.

⁶ By all official databases and by the Association of Greek Institutional Investors. See also Sirri and Tufano (1998) and Pattel et al. (1990).

⁷ In the Appendix the interested reader may find detailed descriptions of the Morningstar Star Rating System.

⁸ Percentage Net Flows are Net Flows normalized to Net Asset Values. This figure represents only the flow of new capital to the fund as the price impact is taken out of the change in NAV's. For a more detailed analysis see the following section on data description.

⁹ In the tables the values of the Spearman rank correlation coefficient are presented together with their t-statistics. The ones in bold denote statistically significant results. Hypothesis testing has been conducted w.r.t. the tables of the appropriate t-distribution and on a size of 5%.

¹⁰ As equity funds in Greece are allowed to hold big proportions of their total capital (up to 35%) in cash (or in money market accounts) they do not suffer from liquidity provision problems.

¹¹ Previous studies on the Greek mutual fund industry (Philippas and Tsionas, 2003) have also suggested this result. It has to be noted, however, that due to limitations of the relevant data, we had to use daily returns on a yearly basis instead of monthly returns over three years as Morningstar formally does.

¹² Such a scenario would lead the managers of the funds to chase returns increasing the risk of the fund, hoping that they will attract inflows and hence maximize their fund size-based compensation, à la Chevalier and Ellison (1997).