Abstract

This thesis investigates the nature of the relationship between mutual fund flows and fund performance in Canada. Specifically, we investigate the non-linearity (or "asymmetry") of the relationship, and how the relationship differs for equity and fixed-income funds using both excess and raw returns. We also test whether frictions prevent investors from punishing poor performers, and whether there are decreasing returns to scale in mutual fund management. Using a sample of 119 equity and 44 fixed-income funds managed by public fund sponsors, we find that when fund performance is measured on a risk-adjusted basis versus benchmark returns, there is evidence of rational asymmetry in the flow-performance relationship for Canadian equity funds. We note that non-performance factors, especially prior flow, are significant predictors of funds flow for both equity and fixed-income funds. We also find that frictions do affect the flow-performance relationship, and that returns to scale in mutual fund management appear to be constant