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Indexing and the performance-flow relation of actively managed mutual funds

Author

Listed:
  • Lesmeister, Simon
  • Limbach, Peter
  • Rau, P. Raghavendra
  • Sonnenburg, Florian

Abstract

We exploit the staggered introduction of index funds in different segments and countries to study how increased competition from indexing affects the performance-flow relation and incentives of actively managed equity mutual funds. An increase in the market shares of available country-level index funds in active fund benchmarks is associated with a significantly lower sensitivity of flows to past performance and with a shift from a convex performance-flow relation towards a more linear relation. The increased competition from index funds is also associated with a higher fund performance-liquidation sensitivity, suggesting real economic consequences for active fund managers and fund management companies.

Suggested Citation

  • Lesmeister, Simon & Limbach, Peter & Rau, P. Raghavendra & Sonnenburg, Florian, 2022. "Indexing and the performance-flow relation of actively managed mutual funds," CFR Working Papers 22-02, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:2202
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    performance-flow relation; performance-liquidation sensitivity; mutual funds; active management; passive management; competition;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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