Determinants of Mutual Fund Performance Manipulation under Different Market Conditions in South Africa

This study identifies and assesses the determinants of mutual fund performance manipulation under different market conditions, to provide explanations regarding the continuous flow of investors' assets to consistently underperforming active funds in South Africa. A dynamic panel two-step GMM model is estimated to test the effect of bullish and bearish market conditions on performance manipulation and its determinants, using quarterly data covering 2006 to 2019 of 52 active equity funds. The period (2006 to 2019) was purposively selected to capture the impact of the global financial crisis on the performance of funds. The results show that raw returns and size constitute fund-specific factors that drive performance manipulation among fund managers while economic size and market conditions are the systemic dynamics that influence manipulation decisions among fund managers. This study represents a novel analysis of the predictive effect of bullish and bearish market conditions on fund performance manipulation and its determinants. Policymakers should ensure the stability of the macroeconomic environment as the direction of economic growth is linked to mutual fund manipulation.