What Operational Characteristics of Mutual Funds Affect Exit Decisions and When? Evidence from Taiwan

Abstract

We investigated fund operating characteristics that cause fund companies to perform fund exit decisions and at what point of funds' lifecycles apply to fund liquidation or mergers. We also examined whether extra variable causes an important determinant effect and how fund operating characteristics before and after fund liquidations or mergers change. The empirical results show that: (1) the factors that affect within-family mergers are fund performance and flow from both cross-section and time-series views. The total net assets affect within-family mergers just in a cross-section analysis, not a lifecycle characteristic in a time-series analysis. Moreover, we found that performance volatility also affects exit decisions. The expense ratio and fund age are not the determinants for three type fund exits in Taiwanese onshore funds. (2) For the liquidation, total net assets, flow, performance volatility, and mid-term buy-hold returns have a significantly negative relationship with the fund liquidations from both the cross-section and time-series views. (3) In general, cross-family fund mergers are potentially conducted for strategic considerations rather than based on specific factors. (4) The performance volatility level before and following mergers was substantial and significant for within-family fund mergers; the expense ratio level before mergers was significant greater than following mergers for cross-family fund mergers.

The Risk-Adjusted Performance of Alternative Investment Funds and UCITS: A Comparative Analysis

“…The way in which funds were sampled is prone to survivorship bias since we only considered those funds which were active throughout the entire sample period. This may tilt results in favour of better performing entities, because underperforming funds are more likely to exit the market (Lai & Wang, 2016) and the merging of funds may be connected with unsatisfactory perfromance (Wang & Huang, 2013). Finally, given that the NAVs of the funds depend on the prices of the underlying holdings such as stocks, the former are prone to unaccounted-for factors such as stock price seasonality (Camilleri, 2008;Lucey& Whelan, 2004), and non-synchronous trading effects (Day & Wang, 2002;Camilleri & Green, 2014).…”

Mutual Funds’ Exits, Financial Crisis and Darwin

“…There is a substantial body of the literature that documents that poor performance is an important factor in determining mutual funds' exit (e.g. Makadok and Walker, 1996;Jain and Wu, 2000;Jayaraman et al, 2002;Zhao, 2003;Khorana, Tufano and Wedge, 2007;Rohleder, Scholz and Wilkens, 2010;Wang and Huang, 2013;Cogneau and Hübner, 2015) and that the worst performing funds are more likely to be liquidated than to be merged with other funds (Zhao, 2003). It is also recognized that funds' volatility, flows, age, size, and expense ratios play a role in determining mutual funds' fate (e.g.…”

“…Decker and Mellewight, 2012), they are associated with relative poor performance, although other factors are also shown to matter (e.g. Jayaraman, Khorana and Nelling, 2002;Wang and Huang, 2013). In this respect, exits and divestitures can be thought of as exhibiting an element of a "Darwinian" process, eliminating the weaker parts of a business (regardless of whether the relative performance is assessed in comparison with other projects run by the same corporation or in comparison to its competitors (Kolev, 2016), and regardless of whether it is assessed based on purely financial performance or includes non-financial goals (e.g.…”