Mutual funds with fixed-income holdings: a closer look at recent trends in the market

This thesis aims to shed light on research developments in mutual funds with fixed-income holdings, focusing on the 2007-2008 financial crisis and post-crisis periods. This research comprises three studies. Firstly, four key research genealogies are identified via a systematic review of the literature, namely: 1) Performance Persistency and Active Management; 2) Green/Socially Responsible Funds; 3) Funds’ Flow and Flow-Performance; and 4) Money Market Funds and Financial Crisis. The second and third studies expand on the two less-explored genealogies of “Money Market Funds and Financial Crisis” and “Green/Socially Responsible Funds”, respectively. 

The second study examines the Money Market Funds (MMFs hereafter) research stream, investigating the impacts of the new Security and Exchange Commission (SEC) regulations implemented in 2016. The new regulations had heterogeneous effects on different subcategories of the MMF industry; for example, they affected prime institutional MMFs to a high degree, while government MMFs were minimally affected. These differences in information flow rate in different subcategories provide a unique setting and a natural experiment to test the rational expectation models, which suggest that information shows up in the form of market volatility (Kyle, 1985; Ross, 1989). Using a difference in differences approach, this study finds that the subcategories of MMFs hit by larger information flow as a result of the new regulations experience a larger change in market volatility during the regulation change period. Volatility linkages between prime and government sectors also demonstrate a large increase around both the announcement and implementation dates. 

The third study focuses on fixed-income funds, which are active in Socially Responsible Investment (SRI funds hereafter) from the perspective of investors’ flow during different time iii periods and market conditions. The findings reveal negative and significant flows for the decade Jan 2001-Dec 2009, but positive and significant flows for the second decade (Jan 2010 to Sep 2019). In addition, by defining a window around the recent financial crisis, this study examines flows into fixed-income funds (in general) in addition to SRI fixed-income funds. Consistent with the literature (Chalmers et al., 2013), the results indicate the “flight-to-safety” phenomenon during the financial crisis, since flows into overall fixed-income funds are positive and statistically significant during the crisis years. However, contrary to the “flight-to- quality” phenomenon found by Parida and Wang (2018) for equity funds with top CSR securities, the present study finds no evidence of significant positive flows into SRI fixed income funds during the crisis period. Instead, flows into SRI fixed-income funds become positive and statistically significant during the post-crisis periods when the market conditions return to normal. This could signal that investor are more prone to include additional, nonfinancial, dimensions in their selection of fixed-income funds and search for quality within relatively safer products (fixed-income funds) when the overall market is experiencing a more stable condition.