The Effects of Monetary Policy Shocks on Mutual Fund Investing

We study the effects of unexpected changes in the stance of monetary policy on mutual fund performance and allocation decisions over the recent period of unconventional U.S. monetary policy. Taking an agnostic approach on the transmission mechanism of monetary policy on mutual fund investing, we find that monetary policy shocks have a direct effect on fund performance and flow dynamics, and that the effect of these surprises differs by investment strategy. The results show that an unexpected tightening of the stance of policy is associated with negative performance and outflows from bond funds, in particular those investing in government, investment grade, and international bonds. Results also point to a negative relationship between equity fund performance and policy tightening. Moreover, Federal Reserve’s balance sheet policy (i.e. large-scale asset purchases) have a strong positive effect on equity fund returns, especially on those investing in emerging markets