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PurposeThis study aims to assess the relationship between cash management and fund performance in index fund portfolios.Design/methodology/approachUsing a sample of 104 index mutual funds that track the Standard and Poor 500 stock market index from January 1999 to December 2016, the authors employ quintile portfolios and different regression models to assess the differences in risk-adjusted monthly returns experienced by index funds managing different cash levels in their portfolios. To ensure the robustness of the results, different sub-periods and market states are considered in the analyses as well as other exogenous factors and fund characteristics affecting the level of portfolio cash holdings and index fund performance.FindingsResults show that index funds holding higher levels of cash and cash equivalents performed significantly worse than their low-cash counterparts. This evidence remains even after considering different sub-periods and bullish and bearish market conditions and controlling for fund expenses and other variables that could drive this cash-performance relationship.Originality/valueThis study expands the extant literature analyzing cash management in the mutual fund industry. More specifically, the analyses focus on index fund portfolios that replicate a specific benchmark, given that their performance differences should not be related to the market evolution but to the factors derived from the fund management and other exogenous issues. These findings are of interest to managers and investors willing to improve their risk-adjusted returns while investing as diversified as a stock market index.

AbstractIn this article, we examine whether active mutual funds that markedly change their exposure to systematic risk factors subsequently outperform. We propose a new returns‐based approach to assess the degree to which mutual funds adjust their risk exposure, with the benefit of not requiring periodically updated information related to funds' portfolio holdings. Applying this measure to active US mutual funds from 1990 to 2016, we provide evidence that mutual fund managers exhibiting substantial changes in their risk exposure generate alphas that are significantly higher than those with limited exposure variation. Other characteristics such as fund tracking errors, fund size, and investment style, or holdings‐based measures cannot explain these findings. Analyzing the long‐term persistence of active management, we provide evidence that the outperformance is due to managers' skill rather than to luck. Our findings contribute to the empirical evidence suggesting that active management may in some cases, produce short‐term performance persistence.

AbstractThis study analyzes the demand for conventional and socially responsible (SR) mutual funds using cash flow data from a large sample of U.S. equity funds. For both types of funds, previous results have a positive impact on inflows. However, redemptions' behavior differs. Outflows correlate negatively with past results in conventional portfolios, whereas this relationship is positive for SR funds: investors are more likely to redeem shares in the best‐performing funds while holding funds that performed poorly. This behavior is compatible with a disposition effect in SR funds. These results hold even after controlling for other variables driving mutual fund demand. Hence, inflows and outflows of conventional funds were found to be positively related to past idiosyncratic risk, expenses and turnover, but negatively related to size and age. For SR funds, these relationships are stronger for size and idiosyncratic risk, and take the opposite sign for age, expenses and turnover.