Return Persistence and Investment Timing Decision in Taiwanese Domestic Equity Mutual Funds

Abstract

Purpose – The purpose of this paper is to investigate whether mutual fund investors can make effective cash flow timing decisions and examine the sensitivity of these decisions to past fund performance using cash flow data at the individual fund level.

Design/Methodology/Approach – This study examines performance persistence and investor timing ability of 200 domestic equity mutual funds in Taiwan between 1996 and 2009. In particular, a performance gap measuring the difference between dollar-weighted average monthly returns and geometric average monthly returns is used to evaluate investors’ timing ability.

Findings – The empirical results show that funds that have performed well (poorly) in the previous year tend to continue performing well (poorly) in the following year, and investors’ timing performance is negatively related to fund performance. The results also show that investors’ timing performance is significantly and negatively related to fund size, length of fund history, and momentum-style of funds, but positively related to value-style funds. These results suggest that mutual fund investors are loss-averse and demonstrate return-chasing behavior in well-performing funds.

Originality/Value – The paper contributes to the mutual fund performance literature by proposing an integrated framework that jointly tests fund performance and how it affects investors’ cash flow timing decisions. Furthermore, the paper individually measures investors’ timing sensitivity for the current best (worst) performance funds and consecutive two-year best (worst) performance funds, and contributes to a growing body of research on the behavior of mutual fund investors.

Keywords: Taiwan, investors, Unit trusts, cash flow, mutual funds, Investors’ timing, loss aversion, performance persistence, return-chasing