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Fund Scalability Research Offers Insights on Mergers


In a recent paper, a researcher from the University of Arizona examined funds before and after mergers in an attempt to study the effect of scale on performance. The paper, entitled Do Mutual Funds Have Decreasing Returns to Scale? Evidence from Fund Mergers, reviewed mergers of diversified U.S. equity mutual funds from 1991 to 2013 following the funds for four years pre and post-merger.

The findings indicate that mergers negatively affect the acquiring fund’s performance, with performance trending negatively into the second post-merger year; in fact, performance levels did not rebound to pre-merger levels until year four. The paper also found that funds tended to experience outflows in each of the post-merger years, and that performance recovered as the fund size decreased.

The article also offered insights into the typical metrics of a merger, finding that the average acquiring fund grew 50% as a result of the merger. Among the funds in the study, the acquiring funds generally had greater assets under management, longer tenure, and lower fees than the acquired funds, and positive flows in contrast to the acquired fund’s generally negative flows. When compared with funds not involved in mergers, however, while acquiring funds had similar pre-merger performance levels, they typically had lower assets under management and higher fees.