Are Mutual Funds Managed by Banks biased? Analysis of Returns and Flow of Equity Funds

Abstract

This research aims to study the effect of bank stock returns on the returns and money flows of equity mutual funds in Saudi Arabia. This study included all equity funds managed by investment companies owned by Saudi banks (both traditional and Islamic). Multivariant regressions are implemented using monthly data starting from 2006 to 2017. The results show that there is a positive correlation between the bank returns and the equity mutual funds returns, which illustrate the bias of fund managers through investing in the stocks of banks that own by their mother companies. As a result, it is possible to predict the variations funds returns by monitoring the stocks of the banks. Furthermore, the results show that there is a significant relationship between bank stock returns and the mutual funds flow. The outcomes exhibit a positive impact of the previous month bank returns on current equity fund flow which means that investors are motivated by the performance of bank stocks. In conclusion, the findings demonstrate that bank performance is a key driver for fund return and flow. This study reveals important implications for academic researchers, investors and fund managers to better understand the behaviour of the Saudi mutual fund market.