Mutual Fund Closures Reach Record High

Caroline Maxwell, InvestorsOffshore.com

27 March 2001

Now is probably not the best time to be a mutual fund manager. The beleaguered souls have been beset by criticism from all sides recently, and a new study from Wiesenberger, the fund tracking arm of Thomson Financial has shown that investors are increasingly voting with their feet.

According to the report, a record 226 US mutual funds were shut down last year, partly as a result of increased industry competition, but also partly due to increasing impatience among investors wanting to see performance. Ramy Shaalan, the mutual fund analyst who conducted the study, expressed surprise at the record number of closures (which although alarming, represent just less than 1% of the total 12,000 funds) and revealed that the average life-span of many funds has shrunk from 21 months in 1998 to 16 months in the year 2000. 'This almost drastic drop in the life-span of funds that end up liquidating tells me investors are becoming less tolerant of poor-performing funds' he said.

In 2000, bond funds and foreign funds were among the hardest hit, making up half and one third of the closures respectively. Mr Shaalan believes that this is due to the inherent caution of retail investors, which was exacerbated by the volatile market conditions of last year; many were dubious about venturing into what they saw as riskier markets, often for smaller returns.

The more recent ups and downs in the markets have also prompted negative comment, this time regarding disclosure (or lack of it!) Although financial pros are advising mutual fund investors to take a step back and brush off the stream of bearish bad news many, being only human can't resist, but are finding themselves frustrated by the lack of information about how their fund manager is reacting to market conditions. Although investors can get daily readings on the value of their fund shares, mutual funds are only required to report to their shareholders once every six months, and because of the typical lag between the publication of the report and it being received by the shareholders, the information it contains tends towards the obsolete.

Fund managers, however, argue that increased disclosure could actually harm fund returns, as revealing their investment strategies would trigger a stampede as other investors followed their lead. However, (at the risk of jumping on the fund manager knocking bandwagon) given the industry's performance over the past year, one has to wonder whether that is such a risk any more…

Recommended