Temi di discussione

Temi di discussione

(Working Papers)

When the panic broke out: Covid-19 and investment funds' portfolio rebalancing around the world

by Massimiliano Affinito and Raffaele Santioni

1342

July 2021

Number

Temi di discussione

(Working Papers)

When the panic broke out: Covid-19 and investment funds' portfolio rebalancing around the world

by Massimiliano Affinito and Raffaele Santioni

Number 1342 - July 2021

The papers published in the Temi di discussione series describe preliminary results and are made available to the public to encourage discussion and elicit comments. The views expressed in the articles are those of the authors and do not involve the responsibility of the Bank.

Editorial Board: Federico Cingano, Marianna Riggi, Monica Andini, Audinga Baltrunaite, Marco Bottone, Davide Delle Monache, Sara Formai, Francesco Franceschi, Adriana Grasso, Salvatore Lo Bello, Juho Taneli Makinen, Luca Metelli, Marco Savegnago. Editorial Assistants: Alessandra Giammarco, Roberto Marano. ISSN 1594-7939 (print) ISSN 2281-3950 (online) Printed by the Printing and Publishing Division of the Bank of Italy

WHEN THE PANIC BROKE OUT: COVID-19 AND INVESTMENT FUNDS' PORTFOLIO REBALANCING AROUND THE WORLD by Massimiliano Affinito* and Raffaele Santioni*

Abstract

To contribute to the understanding of investment funds' (IFs) behaviour, the paper exploits the exogenous shock of the Covid-19 pandemic and analyses more than 12 million security sales and purchases during the first four months of 2020 by over 20,000 IFs from more than 40 national jurisdictions and investing in more than 100 economies and 20 industries. Our estimates reveal that, when the emergency strikes, IFs do not sell indiscriminately but divest from assets considered the most vulnerable at the moment, that is, those issued by more Covid-affected countries and industries. Our results also show several dimensions of heterogeneity according to the pandemic outbreak phase, asset type, IF category and performance, extent of unitholders' outflows, and nationality of IFs. Our results, on the one hand, provide new evidence on the intrinsic fragility of IFs, but, on the other, they also show that IF industry includes heterogeneous institutions that behave very differently. Finally, our results document that monetary policy measures have a reassuring effect also for IFs, which corroborates recent evidence on a non-bank financial institution channel of unconventional monetary policies.

JEL Classification: G01, G12, G15, G32. Keywords: coronavirus, investment funds, Morningstar holdings, pandemic, portfolio rebalancing, resilience. DOI: 10.32057/0.TD.2021.1342

Contents

1. Introduction ........................................................................................................................... 5 2. Related Literature: review and contribution.......................................................................... 9 3. Data...................................................................................................................................... 13 4. Empirical strategy................................................................................................................ 17 5. Baseline results .................................................................................................................... 19 6. Extensions............................................................................................................................ 22 7. Robustness checks ............................................................................................................... 29 8. Conclusions ......................................................................................................................... 33 Tables and figures .................................................................................................................... 34 References ................................................................................................................................ 51 Appendix: variable definitions ................................................................................................. 58

_______________________________________ * Bank of Italy, Directorate General for Consumer Protection and Financial Education.

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