Diversification versus Concentration Motives
in Mutual Fund Mergers

Abstract

This study examines the commonality between characteristics of acquirers and those of targets in mutual fund mergers. A positive and significant commonality would align with acquirers targeting similar funds and thus expecting further concentration in their segment. An opposite result would lend credence to the hypothesis that acquirers aim to diversify away from their original characteristics. Our empirical results show that acquirers and targets share positively correlated total net assets, expenses, turnover, and age, whereas they exhibit nonsignificant correlations in performance and flows. Thus, the potential for diversification could stem from the latter two characteristics. We then test whether the differences between the characteristics of acquirers and targets predict the post-merger performance of the acquirers. We find that acquirers that target funds with poorer performance, higher turnover, and higher expense ratios exhibit a decrease in their post-merger performance.

TOPICS: Mutual funds/passive investing/indexing, performance measurement