Milk or Wine: Mutual Funds’ (Dis)economies of Life

53 Pages Posted: 18 Jul 2015 Last revised: 21 Jul 2015

See all articles by Laura Dahm

Laura Dahm

University of Cologne - Department of Finance & Centre for Financial Research (CFR)

Christoph Sorhage

University of Cologne - Department of Finance & Centre for Financial Research (CFR)

Date Written: July 20, 2015

Abstract

Mutual fund investors are supposed to make long-term investments instead of striving for quick fortunes. However, the dynamics of funds’ ability to generate abnormal returns over their lifetime is still an unattended issue. This paper provides evidence on the liability of newness and liability of aging theory that funds’ investment skill changes to the positive or negative over time. Our results find strong support for an underperformance of mature funds consistent with the liability of aging theory. Furthermore, the observed diseconomies of life result from older funds pursuing less innovative investment strategies. The lack of innovation manifests in less performance enhancing trading and fewer investments in hard-to-value stocks. Still, we provide evidence that less performance sensitive as well as non-institutional investors seek investments in mature funds and that they benefit from more stable investment styles and performance outcomes.

Keywords: Mutual funds; Fund age; Innovation; Liability of aging; Fund performance; Fund behavior

JEL Classification: D22; D23; D92; G11; G23; L25

Suggested Citation

Dahm, Laura and Sorhage, Christoph, Milk or Wine: Mutual Funds’ (Dis)economies of Life (July 20, 2015). Available at SSRN: https://ssrn.com/abstract=2631615 or http://dx.doi.org/10.2139/ssrn.2631615

Laura Dahm

University of Cologne - Department of Finance & Centre for Financial Research (CFR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

Christoph Sorhage (Contact Author)

University of Cologne - Department of Finance & Centre for Financial Research (CFR) ( email )

Cologne, 50923
Germany
49 221 470 7885 (Phone)
49 221 470 3992 (Fax)

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