The AMF releases a research paper on French bond funds' flow-performance relationship

Potential vulnerabilities

Bond funds mostly invest in listed debt securities, and some international institutions therefore consider them as credit intermediaries that share several common features with banks. 

A number of economists have emphasized the risks that these funds might induce for financial stability, stressing in particular the imperfect matching between the liquidity promised to investors and that of the underlying assets, a mismatch that could induce fire sales. Studying subscription and redemption flows, their drivers and their potential for self-reinforcement is therefore crucial to assess the potential vulnerabilities of the sector. 

As of end-2022, bond funds represented 15% of French funds’ asset under management. Their total net assets grew by 45% between 2006 and 2022. 

A statistical analysis covering 817 funds

The research builds on an extensive dataset that combines several regulatory reportings relating to the population of collective investment undertakings domiciled in France. 817 such funds are observed at a daily frequency between March 2019 and April 2021. This period includes the Covid crisis, which allows to assess whether investors react differently to past performances in a market stress situation. 

Conclusions of the paper

The results confirm that flows are correlated to funds’ past returns, but do not find that investors over-react to negative performance. Furthermore, crisis episodes or funds’ risk levels do not appear to affect investors’ sensitivity to past returns.

These observations stand in contrast with the findings of earlier research papers, based on data from other jurisdictions (the United-States in particular). The specific characteristics of French bond funds’ investor base could partly explain these atypical results. A better understanding of the investor base on the liability side of funds appears to be key.