Mutual Funds’ Exits, Financial Crisis and Darwin

Abstract

It is recognized in the literature that there is a negative relationship between fund performance and fund exit. This paper analyses the performance of 6,600 U.S. mutual funds that exited the market in the 2000–2014 period and nearly twice as many U.S. mutual funds that remained operational to provide evidence on whether fund–families acted in the best interest of their investors by exiting the worst performing funds. We show that the negative performance–exit relationship broke down during the 2008 financial crisis. We also show that the absence of the clearing ‘Darwinian’ forces during the crisis period had a negative impact on investors’ wealth. We show that although the mergers that occurred during the financial crisis did not result in the post–merger decline in the performance of the acquiring funds, the mergers that occurred in the years following the financial crisis resulted in the statistically significantly worse post–merger performance of both the acquirers and of the targets in comparison with their pre–merger performance.

Keywords: mutual funds, performance, liquidations, mergers, exit, financial crisis, agency conflict

JEL Classification: G23, G11, G01