One salient feature of financial globalization has been the growth of international mutual funds. To a significant extent, this reflects the fact that investors in mature markets have increasingly sought to diversify their assets by investing in emerging markets, often through so-called dedicated emerging market funds (which invest exclusively in emerging markets) or through increased emerging market participation by globally active funds.
As noted by Eichengreen and Mussa (1998), this development has been facilitated by technological change, privatization in emerging markets, far-reaching deregulation of financial markets in industrial countries in the 1980s and early 1990s, the growth of institutional investors in advanced economies, and macroeconomic and trade reform in developing countries, which have rendered emerging markets more attractive.
As a result, gross portfolio flows to emerging markets more than tripled from 1997 to 2009 (from US$132 million to around US$421 billion), with emerging market funds accounting for a significant fraction of those flows. While these flows reverted temporarily during the global financial crisis in 2008, 2009 and 2010 again saw record flows from both equity and bond mutual funds (Table 1), with the assets under management of emerging market funds reaching unprecedented heights (Figure 1).
Contents
I. Introduction
II. Portfolio Choice, Fund Managers’ Incentives, and Consequences for Capital Flows
- A. Theoretical Considerations
B. Empirical Evidence
III. Transparency, Informational Asymmetries, Asset Allocation, and Capital Flow Volatility
- A. Transparency and Asset Allocation
B. Transparency and Volatility
C. Empirical Evidence
IV. Conclusions
References
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