(Bloomberg) -- Who is most likely to ditch a mutual fund when a crisis hits? If you assumed it’s flighty retail investors or cash-hungry corporations, the latest research suggests you’re wrong.

The investor type most prone to “runs” – frantic selling at a time of market stress – is the fund sector itself, a team of academics from Columbia Business School and the European Central Bank has discovered. They analyzed the trading dynamics of euro-area funds during the Covid-sparked turmoil of 2020, and identified substantially higher outflows in share classes more heavily owned by other funds.

The findings, published last month, have important implications for investors of all stripes. They suggest any holdings in a portfolio that are heavily owned by funds will be more likely to see an exodus during times of turmoil — and hence suffer outsized declines.

“It is the open-ended nature of mutual funds coupled with their cross-ownership structure that allows for initial fund outflows to amplify and trigger widespread redemptions of fund shares,” Nolwenn Allaire at Columbia and Johannes Breckenfelder and Marie Hoerova at the ECB wrote in their working paper, Fund fragility: the role of investor base.

The trio sliced and diced both bond and equity mutual funds by ownership. They showed that a share class of a bond fund that was more than 25% owned by other funds experienced outflows 6 percentage points larger than different share classes of the same product. The pattern was similar in equity funds, the researchers said, although outflows there were much lower overall.

On one level, the results make intuitive sense. If a mutual fund is hit by large redemptions, it generally has to sell to meet them — and if a substantial part of its holdings are in other funds, there’s a good chance that is what it will sell. But the findings are also at odds with common narratives that panicking amateur investors or companies in desperate need of cash drive such outflows. 

Through the lens of the new research, those investors may have triggered initial withdrawals, but it is funds holding other funds that amplify the effect.

The findings chime with the conclusions of an earlier study published by Simon Glossner, an economist on the board of governors of the Federal Reserve, and a trio of academics, who studied the behavior of US stocks in the Covid crash. They showed that equities with higher institutional ownership performed worse, arguing that financial firms were selling to simultaneously meet redemptions and cut risk in their portfolios. On the flip side, “at least some” retail traders provided liquidity, the authors said.

But the debate is far from clear cut. A 2021 paper by a group of academics from the US and China showed that asset managers that hold big stakes in a number of companies within the same sector can act as dampeners of future stock price crash risk. An informational advantage in the industry makes it less prone to sell on false signals, according to the study. 

Bolstering the idea that mom and pop investors have been unfairly maligned, Allaire, Breckenfelder and Hoerova’s paper found that fund share classes more than 25% owned by households posted significantly lower outflows. The difference was not driven by any “gap in investor sophistication” between retail traders and institutional players, the authors argued, as share classes owned heavily by insurers also showed lower outflows.

“One common explanation for these outflows was a collective ‘dash for cash’ by consumers and firms in need of liquidity,” Allaire, Breckenfelder and Hoerova wrote of the panicked selling at the start of the pandemic. “Our findings imply that, among different investors holding mutual fund shares, the most run-prone investor type is the fund sector itself.”

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