Cash holdings and the performance of European mutual funds.

• We investigate the determinants and performance implications of cash holdings for a large sample of EU equity funds. • EU cash holdings are influenced by a fund's fee structure, past flows and flow volatility, and a fund's investment strategy. • EU funds with high abnormal cash earn higher risk-adjusted returns than their low abnormal cash peers over the subsequent six-months period. • This outperformance disappears after 12–18 months. We investigate the determinants and performance implications of cash holdings for a large sample of actively-managed equity funds domiciled in the European Union (EU). In line with recent evidence from the US, we observe that cash holdings are strongly influenced by a fund's fee structure, past flows and flow volatility, and a fund's investment strategy. EU Funds with cash holdings in excess of the level predicted by fund attributes (i.e., high abnormal cash funds) earn higher risk-adjusted returns of 0.48% than their low abnormal cash peers over the subsequent six-months period. However, this outperformance disappears after 12–months. [ABSTRACT FROM AUTHOR]