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U.S. Mutual Fund Retail Investors in International Equity Markets:
Is the Tail Wagging the Dog?
Jorge A. Chan-Lau1 and Li Lian Ong2
Abstract
Do the dynamics of net flows to U.S. retail mutual funds affect equity returns in emerging markets? The question merits further examination since retail investors in mutual funds can exert a much greater degree of “control” over these funds via cash injections or redemptions at any time. Vector autoregression (VAR) analysis shows increased discrimination across emerging market regions after the Asian crisis as investors focused on individual regions rather than on emerging markets as a generic asset class. Crossover funds allocations also appear to affect emerging market returns. Furthermore, investment decisions by fund managers seem to be largely driven by retail investor allocations.
JEL Classification Numbers: F21, G15.
Keywords: mutual funds, retail investors, equity markets, dedicated funds, crossover funds.
1. Corresponding Author. International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431, U.S.A.; Tel: +1 202 623 4271; Fax: +1 202 589 4271; Email jchanlau@imf.org.
2. International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431, U.S.A.
Acknowledgments
The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. The authors would like to thank David Ordoobadi and Jorge Roldos for their extensive comments. Any errors or omissions remain the responsibility of the authors.
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