Fund flows and past performance in Australian managed funds

Purpose – The purpose of this paper is to examine the various segments of the managed funds market to establish if there is any significant difference in the way the assets are allocated into various asset categories and if investors base their investment decisions based on the past performance of the fund. Design/methodology/approach – An average investor who does not possess superior investment knowledge may base their investment decision on the past performance of funds resulting in flow based on past performance. This study uses a panel regression model to test the relationship between net flows and past excess returns. Findings – Significant differences are found in asset allocation between the retail and wholesale segments. Retail investors prefer less risky investments compared to wholesale investors and have lower preference for overseas investments. The results indicate that investors base their investment decisions on the past performance of funds, with the retail segment showing a higher level of influence of past performance, as compared to the wholesale segment. The results further show less evidence of a reaction to risk among the managed investment categories. Practical implications – Fund managers use fund performance for marketing purposes and results of the study may be of importance to the managers and investors in understanding this objective. The findings are also of significance for policy makers in terms of understanding investor behaviour. Originality/value – This is the first study of the Australian managed funds industry (including wholesale and retail funds) that tests the link between past performance and fund flows. The study includes data until June 2008, which includes a period when a number of policy changes occurred in Australian superannuation industry.