Four Studies of Managed Funds

This thesis, structured around four interrelated empirical studies, investigates three key aspects that relate to the practice of fund management and analysis: (1) fund returns, (2) fund flows, and (3) asset allocations. In fact, managed fund investors make investment decisions primarily on the assumption that managed fund performance persists over time, despite the lack of evidence for such performance persistence. Therefore, it is compelling to empirically investigate factors that are of vital importance to investors if these factors can improve investors’ ability to select winning funds, which will ultimately improve their investment performance. The first empirical study investigates the relationship between the performance of Australian managed funds and the variables that capture the state of the economy. Apparently, Australian investors make investment decisions based primarily on past performance, disregarding other factors. This study, motivated by this issue, investigates factors that capture the state of the economy, both domestic and international, with the aim of establishing whether those economic factors have a possible impact on Australian managed fund returns. This study contributes to the existing body of literature by utilising domestic and international macroeconomic variables to explain Australian managed fund returns. Moreover, the relationship uncovered between fund returns and macroeconomic variables challenges the past performance issue attributed to Australian investors. Finally, the findings of this study will motivate practitioners to extend their practice beyond using past performance to encompass other potential factors. This study uses principal component and regression analyses to discover that fund returns can be significantly explained by principal components that reflect both international and domestic variables, especially at the next two quarters. The relationships between fund returns and macroeconomic variables are predominantly negative. Further, the pooled regression results show that, at a more general level, the explanatory power of macroeconomic variables is relatively weak regarding both fixed interest and international shares funds, but is strong on multiple assets, property, and Australian shares funds. Building on the first empirical study, the second is an investigation of whether economic variables have the potential to predict Australian managed fund returns. Using economic variables to predict fund returns is a relatively new area of research; no published study was found that investigates this issue in Australia. Therefore, this study helps to fill this gap by investigating macroeconomic variables from Australia and overseas markets, as well as establishing whether those variables have the potential to predict Australian managed fund returns. This study contributes to the growing literature investigating the relationship between macroeconomic variables and managed fund returns by shedding new light on the predictive power of macroeconomic variables on managed fund returns. Furthermore, the findings of this study have the potential to add value from the practitioner’s perspective. Since investors always have to reallocate investments between funds, they need to know which economic factors may affect their fund returns. Moreover, the findings may refine investor’ ability to improve managed fund returns by monitoring the changes in economic conditions. The timeseries regression results suggest that coal price, GDP, and the treasury bill rate have predictive power over fund returns. The third empirical study investigates the relationships between the managed fund flows from different investor groups, the stock market returns and the factors that capture the state of the economy in Australia. The dynamic interactions between fund flows and stock market returns have been well examined. More recently, studies investigating fund flows and market returns from a different dimension have tried to establish the relationship between fund flows, stock market returns, and the real economy. As there is no study addressing this issue in Australia, this study investigates this one in the Australian context. This study contributes to several strands of literature. Firstly, it is the first to expand the stream of research investigating fund flows and stock market returns by providing Australian evidence. Secondly, it sheds new light on the ongoing debate regarding the relationship between fund flows and stock market returns by linking the results back to the broad literature of the feedback-trader hypothesis. Thirdly, it provides a valuable extension to an understanding of the relationship between fund flows and stock market returns in Australia. The mechanism between fund flows and the real economy may affect investors’ returns if they collectively rebalance their portfolios in response to the changes of these variables. This mechanism may also improve the efficiency of fund management by understanding and predicting investors’ allocation decisions. This study will also help fund managers to reach optimal investment decisions by incorporating fund flows as a factor. The findings suggest that fund flows from different investor groups are related to the state of the economy which is proxied by financial and macroeconomic variables. This study supports the theory that the co-movement of fund flows and stock market returns is explained by macroeconomic news. The state of the economy does not help to predict fund flows; however, fund flows help to predict the state of the economy. This study also supports the theory that fund flows are forward-looking and can predict the economy. Moreover, different investor groups, which are proxied by different fund categories, exhibit heterogeneous investment patterns. The findings are more pronounced for equity and allocation funds because both of these come with higher risk features, compared with fixed income and money market funds. The fourth empirical study investigates whether the leveraged life cycle strategy is able to produce better retirement wealth outcomes than either the balanced, conventional life cycle, or the dynamic life cycle strategies. Using the factor of leverage in the design of the defined contribution plan’s investment strategy is relatively new; no prior study investigating the comparative performance of leveraged life cycle strategy and other strategies has been found. Studying issues such as these provides a valuable contribution to the body of pension finance literature by embarking on a robust analysis of four factors: balanced strategy, conventional life cycle strategies, dynamic life cycle strategies and leveraged life cycle strategies. This study may be regarded as unique: it is the first to synthesise the leveraged life cycle strategy with other investment strategies currently offered by defined contribution plan providers, as well as by those suggested in the literature. The outcomes of this study may also enhance investors’ ability to improve fund returns by choosing different investment strategies.Thesis (PhD Doctorate)Doctor of Philosophy (PhD)Dept Account,Finance & EconGriffith Business SchoolFull Tex