Institutional capital allocation and equity returns: Evidence from Thai mutual funds' holdings

Stocks that mutual funds buy tend to perform better than stocks that they sell. While this could be interpreted as evidence that managers are skilled at stock selection, we show that this may not be the case. Mutual fund managers tend to have preferences for particular types of stocks (e.g. large, liquid stocks, as documented in the U.S. by Gompers and Metrick, 2001). We show that Thai mutual funds prefer to invest in large cap, growth stocks and tend to buy same stocks they currently hold as they receive fund inflow. This can lead to abnormal returns for those stocks in the market. We relate our finding to the lack of the size premium and the existence of momentum premium in Thailand.