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Fund flows and performance: New evidence from retail and institutional SRI mutual funds

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  • Klinkowska, Olga
  • Zhao, Yuan

Abstract

In this paper we provide a comprehensive analysis of the performance of US SRI mutual funds as well as its relation to the flow of new money that those funds experience in the context of investors sophistication. In particular, we compare the performance of SRI funds with their conventional peers, matched by both managers and characteristics criteria, using several performance measures. We investigate the role of investors sophistication and its influence on the flow-performance and performance-flow relations within the retail and institutional SRI fund shareclasses. For the analysis of the flow-performance relation we use portfolio approach along with monotonic relation test, while the shape of the flow-performance relation is studied using piecewise linear panel regressions. For the performance-flow relation, the flow and unexpected flow portfolios are formed and their risk-adjusted performance is evaluated. We find that SRI mutual fund sector earns positive abnormal returns before expenses and retail SRI funds outperform their institutional peers both, before and after fees. No differences in performance when we consider SRI and conventional funds run by the same management companies. Moreover, we find a positive flow-performance relation which is convex for retail SRI funds but no convexity is found for the institutional ones. We cannot confirm the smart money effect for retail SRI funds, instead we find a dumb money effect for SRI institutional funds. Our paper provides new insights into the role of the investors sophistication for those relations in the presence of sustainability preferences.

Suggested Citation

  • Klinkowska, Olga & Zhao, Yuan, 2023. "Fund flows and performance: New evidence from retail and institutional SRI mutual funds," International Review of Financial Analysis, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:finana:v:87:y:2023:i:c:s1057521923001126
    DOI: 10.1016/j.irfa.2023.102596
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    More about this item

    Keywords

    SRI investment; Retail funds; Institutional funds; Flow-performance relation; Smart money; Dumb money;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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

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