Are target fund shareholders really the winners in mutual fund mergers?

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School of Business | Master's thesis
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OBJECTIVES OF THE STUDY: In my thesis, I study how the target portfolios in mutual fund mergers would have performed compared to the portfolios acquiring them if they had not been merged but continued on their own, target portfolios having a buy-and-hold strategy based on their latest holdings. In other words, I compare the simulated target portfolio returns to the realized acquiring portfolio re-turns in the post-merger period. DATA AND METHODOLOGY: My sample consists of 264 individual merging portfolio pairs from January 2007 to June 2012 and includes mutual fund portfolios investing into US equity products. I compare both raw returns and risk-adjusted returns (Sharpe ratio) on annual basis. All the data is retrieved from CRSP and is free from survivorship bias. For return comparison in the research period I employ Wilcoxon signed rank test and check the robustness of the results with Student's t-test. FINDINGS OF THE STUDY: In the pre-merger period, acquiring portfolios outperform target portfolios. The median paired annual return difference is 1.40% (0.23) two years prior to the merger, and 1.43% (0.23) a year prior to the merger in favour of acquiring portfolios. In the post-merger period, the pattern is reversed as target portfolios have superior performance compared to acquiring portfolios. In the first year after the merger, target portfolios have on median 1.45% (0.13) higher annual returns than their acquiring portfolios, and in the second year the median paired annual return difference has increased to 2.57% (0.49). The superior post-merger performance of target portfolios can be explained by mean reversion taking place from continuity in the underlying holdings sooner than expected and the passive buy-and-hold strategy of target portfolios outperforming the active management of acquiring portfolios.
mutual fund, mutual fund merger, shareholder wealth effect, return simulation
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