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 mutualfund closings by analyzing the investmentper$ormance of open-endfinds that close to new investors. Wefind that: (I) the average excess return (estimated by Jensen’s alpha) was positive in the 24 months prior to closing, (2) the average excess return was not sign$icantly differentfrom zero in the 24 months ajier closing, and (3) the funds in the sample on average exhibited a significant decline in investment pe$ormance afrer closing. These findings suggest that thefund managers’ strategic decision to close the find in order to slow down the growth in net assets does not prevent investmentperjormancefrom declining. For the individual investor, an impendinghnd closing is a signal not to invest in the fund. It is also a signal that current shareholders consider alternative investments.