The winner takes it all : outperformance drives subsequent flows in South African unit trust funds

Abstract

The relationship between unit trust (mutual fund) performance and subsequent investment flows into and out of funds has been the focus of many international studies. Emerging markets, which are characterised by higher risk, weaker institutions, volatile economies and fewer participants, provide an attractive opportunity to examine the flow-performance problem in the context of higher arbitrage costs. This study builds on the findings in the literature of the flowperformance relationship and aims to examine in more detail, and to quantify, the inflow into funds which outperform. The flow-performance relationship is important for investment businesses to understand because of the significant implications this has on the profitability of funds. The research applies a portfolio time-series methodology to Morningstar’s South African fund data, using a buy-and-hold analysis. Two unit trust categories are tested, namely General Equity and Multiasset High Equity funds, and within each category, single manager funds and fund of funds are tested separately. Funds are ranked by their past performance over an optimised 14- month look-back period, and assigned into quintiles. Net flows into each fund in the subsequent quarter are then determined, and the process rolled over on a quarterly basis from 2000 to 2015. We find convincing evidence from an emerging market perspective that equity funds need to perform in the top quintile to attract funds, and observe that relative performance to peers is more important to investors than performance relative to other benchmarks. One additional inference is that the South African unit trust industry is set to face consolidation.