A Life Cycle Analysis of US market funds

Posted by Mike H on 27 July 2016 | Comments

Leng Ling

Department of Economics and Finance, J. Whitney Bunting College of Business, Georgia College & State University

http://www.irabf.org/publication/1A%20Life%20Cycle%20Analysis%20of%20U.S.Mutual%20Funds.pdf

 

This is a 2011 research paper looking at 2,730 open ended US Funds from 1961-2005.It measured performance against age of fund then assessed strategies to reverse this decline . They were mostly unsuccessful.

Abstract: This study proposes a five-stage asset growth model to describe the life cycle evolution of actively managed equity mutual funds and shows that mutual funds exhibit distinctive performance, size, expense ratios, and asset turnover through stages of incubation, high-growth, low-growth, maturity, and decline. It also investigates the viability of managerial strategies to affect a fund’s life cycle evolution and shows that the strategies of changing investment objectives, adding portfolio managers, or downsizing management team do not have a rejuvenation effect. These findings suggest that investors should avoid investing in funds that have evolved to older life cycle stages, as there are few effective strategies that fund advisors can undertake to revive the performance of declining funds.

The article is worth reading to note strategies used within the industry especially during the incubation period force feed performance results.

However, the most useful information for me is in

Table 1 page 11

At 4 years 58 % of funds were still in in a high growth stage.

IN fifth year this dropped to only 4 % of funds in the high growth stage.

In year 7 the number in the low growth stage was 75 %.

In year 8 there was only 21 % remained in the low growth stage ,the rest now only performing at a maturity level ( half the performance of high growth stage).

By year 15 over half are returning less than their index (decline).

Over that time ,for 15 years only one fund seemed to defy gravity with continued high growth. (“Go Lynchie”)

This may suggest that when Mutual funds reach 5 -8 years old they could deserve your closer scrutiny.

Let’s see which fund was established 4 years ago?

Absolutely no pressure at all Mr. Montgomery but we are watching with interest.

Regards

Mike H

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