International Mutual Fund Flows

The last few decades has witnessed a dramatic growth of U.S. based mutual funds that invest in non-U.S. stock markets. Yet we know little about what drives U.S. households to invest in these funds. This paper provides a comprehensive analysis of flows into these international mutual funds for 1970-2003. Our analysis uncovers several new facts about mutual fund flows. First, the empirical findings show a strong relationship between flows into U.S based international mutual funds and the correlation of the fund’s assets and the U.S. market, consistent with a desire for international diversification. Furthermore, the flow-past performance relationship is stronger when these correlations are low and returns on U.S. markets are lower compared to non- U.S. markets. Second, the flows are related to contemporaneous and past fund returns supporting an ‘information asymmetry’ as well as ‘return chasing’ or ‘trend following’ hypothesis for international capital flows. Finally, although there is evidence of fund outflows prior to the currency crises in emerging markets, the relationship is not robust to inclusion of other variables. This does not support the idea that emerging market mutual fund flows are hot money