HOW DO MUTUAL FUND MANAGERS AND INVESTORS (MIS)BEHAVE IN NEW ZEALAND?

Abstract

In this work, I study the behaviour of mutual fund investors and managers using a survivorship-bias free sample from the New Zealand market. I find that investors in the New Zealand mutual funds industry seem to be smart and to be able to pick and invest in funds which will perform well in the subsequent one to six months, as well as to divest from funds which will perform poorly in the subsequent one to six months. I show that this result is not driven by investors who simply choose to invest in funds that performed well in the past, which means they may have some forecasting ability that could be exploited by other less-smart investors. Regarding the study of the behaviour of mutual fund managers in this market, I focus on the extent to which they diversify their portfolios with respect to other funds within the family they are affiliated with, compared to funds from outside their family. I find that funds within the same family have higher correlations in returns than funds belonging to different families, which suggests that investors could be better off investing across families than focusing on just one family of funds. I find that smart investors can incur economically significant diversification costs from investing only in funds affiliated with one same family, compared to investing across different families.