This paper investigates the relation between mutual fund flows and the real economy. The findings of this paper support the theory that the positive co-movement of flows into equity funds and stock market returns is explained by a common response to macroeconomic news. Variables that predict the real economy as well as the equity premium – in particular dividend-price ratio, default spread, relative T-Bill rate and consumption-wealth ratio – are related to fund flows and can account for the correlation of flows and market returns. Furthermore, consistent with the information-response hypothesis, mutual fund flows are forward-looking and predict real economic activity.

This paper investigates the returns and flows of German money market funds before and during the financial crisis of 2007/2008. The main finding of this paper is that, in liquid times, some money market funds (MMF) enhanced their returns by investing in riskier assets. By doing so they outperformed other MMFs, as long as liquidity in the market was high. Investing in riskier money market products, however, widens the typically narrow structure of MMFs and makes them vulnerable to withdrawals. When market liquidity declined during the subprime crisis, illiquid MMFs experienced withdrawals, while funds with safer and liquid portfolios functioned as a safe haven. As German MMFs calculate the value of their shares based on fluctuating net asset value, the findings inform the current debate on regulating MMFs.

We relate Schumpeter’s notion of creative destruction to asset pricing, thereby offering a novel explanation of size and value premia. We argue that small-value firms must offer higher expected returns to compensate for the risk posed by serendipitous invention activity, whereas large-growth stocks provide protection against creative destruction and receive expected return discounts. A 2-factor model that accounts for creative-destruction risk effectively explains the cross-sectional return variation of size- and book-to-market-sorted portfolios. The estimated risk compensations associated with creative destruction are substantial and statistically significant, indicating their relevance for asset pricing.

Abstract Using a unique data set on the ownership composition of euro area equity funds, we find substantial differences in the flow-performance sensitivity across mutual fund clienteles. Households, followed by insurers, display the weakest sensitivity, whereas investment funds—as investors in mutual funds—exhibit the strongest sensitivity. Crucially, these behavioral differences hold within the same fund-quarter, ruling out heterogeneity across funds as a potential driver. We relate these clientele effects to monitoring incentives and balance sheet constraints. Lastly, we find that households respond more strongly to poor performance when surrounded by more performance-sensitive investors, indicating strategic interactions in investor flows.