Evidence from purchases and redemptions in the Spanish equity fund market

The potential relationship between fund flows and performance is a remarkable topic in the mutual fund industry that has been explored by many empirical academic papers. In this work, it is shown that investors in Spanish equity funds respond to past good performance by increasing their (net) purchases, and to past poor performance by reducing their (net) purchases. However, the relationship between flows and performance appears to be non-linear. This non-linearity is different from the one observed in most of the previous research papers. These papers did not find any response to poor performance. Net purchases, purchases and redemptions are analysed separately and, as a new feature, the retail and wholesale markets of mutual funds are addressed. The comparison of the two markets reveals some interesting differences on the determinants of the financial decisions regarding purchasing or selling shares of equity funds. It was also found that investor sensitivity to poor performance is reduced in the case of more visible funds. This puzzling result, which originates in the retail segment, could be explained in terms of the market power of fund families.