The effects of U.S. monetary policy shocks on mutual fund investing

We study the effects of unexpected changes in the stance of U.S. monetary policy on the performance and flows of mutual funds investing in domestic and international financial markets over the recent period of unconventional monetary policy. Taking an agnostic approach on the transmission mechanism of monetary policy, we find that monetary policy shocks have a direct effect on fund performance and flow dynamics, and that the effect of these surprises differs by investment strategy. Results show that an unexpected tightening of the stance of policy is associated with negative performance and outflows from fixed-income funds, in particular those investing in international, government and investment grade bond markets. Results also point to a negative relationship between equity fund performance and policy tightening. Moreover, our findings indicate that Federal Reserve's expansionary balance sheet policy (i.e. large-scale asset purchases) has a strong positive effect on the performance and flows of equity funds, especially on those investing in emerging markets.