Beta or duration? Risk-taking by balanced mutual funds in Korea

Abstract

We examine the risk-taking behavior of balanced mandate managers in Korea between 2011 and 2018. Though it is well known that mutual fund managers face risk-taking incentives after poor performance, balanced mandate managers are unique in that they can choose between whether to take risks in either equities and/or bonds. We find that, following poor relative performance, bond-oriented balanced funds increase their systematic exposure to equities, while "reaching for duration" is confined to equity-oriented managers. Managers thus appear to increase risks in an asset category with a relatively lower portfolio weight. Systematic risk-taking attracts inflows but harms risk-adjusted performance.