Mutual Fund Flow and Past Information: Is the Brazilian Investor Smart?

Informações

Código: FIN568
Divisão: FIN - Finanças
Tema de Interesse: Tema 04 - Investimento e Apreçamento de Ativos

Autores

Gyorgy Varga

Resumo

It is well know that investors pursue past performance (Sirri and Tufano 1998) and investin funds with above average past performance. There is also a large literature trying toforecast performance based on past performance with no conclusive results. This studygoes further in investigate whether or not the new investment flows indicate high futureperformance. High past performance induce high new flow but not all new flow goes tothese funds. Therefore high future performance maybe found in funds with high inflow.Gruber (1996) has launched the Active Fund Puzzle, which asks the question on whyinvestors put money in if on average their performance is below indexed funds. Theanswer could be some performance predictability. If it is the case then new flows goes togo future performance funds! Zheng (1999) has looked in more detail whether it is true.Gruber (1996) and Zheng(1999) have generated the term “Smart Money Effect” (SME)which attributes an abnormal return to funds that receive new money.This article investigates the local investor’s ability to select active funds in Brazil. This apeculiar mutual fund industry with a large information disclosure, no distinction betweenmutual fund and hedge funds, mostly domestic investors and domestic assets.The SME has been investigated in some local markets like Australia by Gharghori et alli.(2007), they find smart money effect in Australia and it is not explained by momentumneither conditional on fund sizeThis article applies the same analysis of Zheng (1999) to the Brazilian mutual fundindustry. Due to the large information availability, it is possible to do the same type ofinvestigation separating the investors in three types: qualified investors, investors ingeneral and exclusive funds. The first one is defined as any financial company, insurancecompany, or pension fund with assets above BRL5 million, and any individual investorwith more than BRL250,000 invested in the fund or over BRL5 million in personalfinancial assets. The second one is any ordinary investor. The third one, exclusive funds,where monies come from only one investor or from a restricted portion of the public,have external managers which decide on the portfolio allocation in general and they areonly a vehicle with the objective of lowering transactions costs.It is a contribution to the international literature on market efficiency because it showsevidence of the SME, furthermore it shows evidence that SME is significant on moresophisticated investors (qualified investors) and not on ordinary investors (investors ingeneral).

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