Mutual Fund Exit and Mutual Fund Fees

Abstract

We examine the effect of mutual fund fee structure on mutual fund exit mode and timing. The evidence presented herein is consistent with fee maximization by mutual fund sponsors or managers, increased conflicts of interest for funds charging 12b-1 fees and higher management fees, and a pecking order for mutual fund exit method. Specifically, mutual fund exits that result in decreased fee income are delayed relative to exits that do not and exit strategies that retain fee income are more likely than strategies that do not. We thank the editor, an anonymous referee, Ron Anderson, Valentina Bruno, Bob Losey, Jerry Martin, and Michael Robe for their helpful comments on early drafts. All remaining errors are our own.

Do Mutual Funds Have Decreasing Returns to Scale? Evidence from Fund Mergers

“…Jayaraman et al (2002), Zhao (2005), and Ding (2006) find that poor performance of target funds is a main reason for within-family mergers. A defunct fund with higher management fees or 12b-1 fees is more likely to be involved in a within-family merger (English, Demiralp, and Dukes (2011)). Khorana et al (2007) find that across-family mergers are more likely when the target board has a larger percentage of independent directors but less likely when the board is paid higher than average.…”

“…The post-merger portfolio reorganization would increase trading costs and reduce fund returns. Acquiring funds may also adopt some of the fee structure of the target funds that have relatively higher expense ratios and 12b-1 fees (English et al (2011)). Acquiring funds may also advertise the newly merged fund to attract inflows (Barber, Odean, and Zheng (2005)), which increases their 12b-1 fee and decreases fund net returns after mergers.…”

Socially responsible mutual fund exit decisions

“…At the family level, Zhao (2005) discovered that large families are more likely to merge portfolios within the family; however, liquidations and mergers across families are more likely for funds belonging to families with poor performance. English, Demiralp and Dukes, (2011) focused on the relationship between exit decisions and fees charged by management companies. Their findings indicate that liquidations occur slowly for funds with high 12b-1 and management fees, while funds with minor fees are quickly merged within the same family.…”

Do Mutual Funds Have Decreasing Returns to Scale? Evidence from Fund Mergers

“…Jayaraman, Khorana, and Nelling (2002), Zhao (2005), and Ding (2006) find that poor performance of target funds is a main reason for within-family mergers. A defunct fund with higher management fees or 12b-1 fees is more likely to be merged within-family (English, Demiralp, and Dukes (2011)). Khorana, Wedge, and Tufano (2007) find that across-family mergers are more likely when the target board has a larger percentage of independent directors but less likely when boards are paid higher than average.…”