The Norwegian mutual fund market : an empirical analysis of the relationship between fund flows and fund performance

Abstract

In this paper, we study the motivation behind flows of capital from investors going into and out of active Norwegian mutual funds, and investigate whether fund flows could partly explain the widespread evidence of non-persistence in fund performance. The data set contains monthly observations from June 1999 to December 2015. To our knowledge the sample is free of survivorship bias and consists of 97 Norwegian mutual funds. We test the impact of returns on flows by running a piecewise linear regression to study investors’ reaction to past performance. Further, we examine if returns are predictable using Flow as an explanatory variable in the short run through a regression with return as the dependent variable. For the long run, we sort funds into quintiles based on accumulated flows over horizons stretching from 3 months to 5 years, and observe the average excess returns in the following period. Our results indicate that there has been a change in investor behavior in light of the Great Recession in 2007-2009, where a strong asymmetric flow-performance relationship observed before the crisis cease to exist in the following years. We are not able to document that fund flows have an effect on performance in the short run. However, we find that it becomes increasingly difficult for managers of large funds with the highest accumulated inflows to generate excess returns as the time horizon increases.