Who Monitors the Mutual Fund Manager, New or Old Shareholders?
Woodrow T. Johnson, University of Oregon

This study tests whether mutual fund shareholders continue to trade in response to fund returns after they make their initial investment in fund shares. It decomposes the relationship between fund returns and shareholder flow in a large, proprietary panel of all shareholder transactions in one mid-size no-load mutual fund family. Results show that both new and old shareholders buy shares during periods of good returns; however, shareholder outflow is essentially unrelated to fund returns. This lack of a return-sell relationship is not driven by locked-in pension assets, shareholders’ ignorance of ongoing fund returns, or embedded capital gains. However, there is evidence that exchanges between equity funds in the family are more correlated with returns of the destination fund than with returns of the origination fund. This may indicate that flow between equity mutual funds is driven by shareholders buying new funds rather than selling old funds.

The challenges of managing the investor demands for liquidity in a mutual fund depend on the flows into and out of the fund. So too does the profitability of running the mutual fund. These results produced in this study help us better understand the determinants of fund flows by invested shareholders. The decomposition of flows between new and old shareholders within and across funds in a fund complex provides information about the stickiness of funds within the fund family.