Fund closings as a signal to investors: Investment performance of open-end mutual funds that close to new shareholders

Abstract

This article examines the growing phenomenon of mutual fund closings by analyzing the investment performance of open-end funds that close to new investors. We find that: (1) the average excess return (estimated by Jensen's alpha) was positive in the 24 months prior to closing, (2) the average excess return was not significantly different from zero in the 24 months after closing, and (3) the funds in the sample on average exhibited a significant decline in investment performance after closing. These findings suggest that the fund managers' strategic decision to close the fund in order to slow down the growth in net assets does not prevent investment performance from declining. For the individual investor, an impending fund closing is a signal not to invest in the fund. It is also a signal that current shareholders consider alternative investments.