The US and the UK Mutual Fund Industry:Study of Market Clearing Mechanisms

Abstract

With $49 trillion of assets under management and thousands of funds in the market, the mutual fund industry around the world has been one of the biggest and most important financial intermediaries. Whether fund-families offer high-quality products to their investors affects the wealth, and in particular the after-retirement wealth, of millions of households. Protecting investors’ interests requires weeding out worse performing funds. In the light of this, this thesis aims to investigate market clearing mechanisms, i.e. mutual fund exit decisions in the U.S. and the U.K markets.

There is no reason to assume that fund-families’ exit decisions are time invariant. This thesis argues that while fund-families had sufficient motivations to close down or re-organise the worse performing funds during non-financial-crisis times, this may not be so during the 2008 financial crisis. The distortion of the market clearing mechanisms during the financial crisis existed in both the U.S. and in the U.K. market. The thesis finds some evidence that funds’ exit decisions were affected by directors’ own remuneration and career concerns and that this was more visible during the financial crisis than during the other times.

Industry structure can affect the strength of market forces to exit low-quality products. As the asset allocation of US funds is not closely monitored or highly regulated, fund managers are free to ‘game’ their investment objectives, which makes it hard to separate the whole U.S. market to create meaningful and distinguished sectors suitable for industry structure analysis. Fortunately, the U.K. mutual fund industry is suitable for such a study. In the UK, the asset allocation of a fund is closely monitored by the Investment Association (IA) to make sure that funds make investments according to their official investment objectives. This makes the actual asset allocation of a fund reflect well the fund’s official (declared) investment objectives. Thus, it is more meaningful to separate the UK market into different sectors according to funds’ declared investment objectives in comparison with the US market. The empirical analysis for each sector in the U.K. market indicates that the market clearing mechanisms were only effective in competitive sectors.

The thesis contributes to the literature on the determinants of mutual fund exits by arguing that the role of poor performance in determining a fund’s fate weakened during the financial crisis. It deepens the understanding of the role of fund boards in protecting shareholders’ interests in different times. It fills the gap in the U.K. mutual fund research by comprehensively investigating, for the first time, the determinants of fund exits over time. Finally, the thesis adds to the organisation studies literature by confirming the importance of industry structure (competitiveness) in exiting poorly performing funds out of the market.

Date of Award	2020
Original language	English
Awarding Institution	University of Bath
Sponsors	China Scholarship Council
Supervisor	Anna Zalewska (Supervisor) & Simone Giansante (Supervisor)