Abstract:
Determining which types of mutual (or managed) investment funds are good
financial investments is complicated by potential survivorship biases. This project
adds to a small recent international literature on the patterns and determinants of
mutual fund survivorship. We use statistical techniques for survival data that are
rarely applied in finance. Of specific interest is the hazard rate of fund closure,
which gives the variation over time in the conditional probability of fund closure
given fund survival to date.
For a sample of 251 retail investment funds in Australiafrom 1980 to 1999 we
identify a hump-shaped hazard function that reaches its maximum after about five or
six years, a pattern similar to the UK findings of Lunde. Timmermann and Blake
(1999). We also consider the impact of monthly and annual fund performance (gross
and relative to a market benchmark). Returns relative to the benchmark are much
more important than gross returns, with higher relative returns associated with
lower hazard of fund closure. There appears to be an asymmetric response to
performance, with positive shocks having a larger impact on the hazard rate than
negative shocks.
