Morningstar - Q4 2021 - 25

Dispatches
EXHIBIT 1
database that launched between 2005 and 2020
to identify several common characteristics among
those that eventually closed. The increasing
number of fund closures over the past five years
(see EXHIBIT 1 ) underscores the importance
of this topic.
The fund characteristics associated with closures
are short lives, low assets under management,
high fees, poor performance, and ties to certain
fund providers.
Fund Age
Most funds that were laid to rest between
2005 and 2020 occurred early in their
lives; about 44% of those that closed didn't
even make it to their fifth birthday. When
older funds closed, they tended to be
merged into other funds, while those with
shorter lives were mostly liquidated. That
trend may be partially explained by fund size,
which appears to be related to age: On
average, older funds have more assets than
their younger counterparts.
Fund Fees
Fees are intertwined with performance: They
directly drag down returns. As fees rise, so
does the likelihood that a share class will shutter.
Fund fees have steadily declined for decades.
As investors flocked to the cheaper entrants,
closure rates in more-expensive funds and share
classes have ballooned. We ranked the share
classes of funds by fee quintile. Those funds that
ranked in the priciest quintile closed at a
clip of more than 60% over the past 15 years-
nearly double the rate of those in the least
expensive quintile.
Fund Size
Fund size is a product of flows and performance.
Thus, it's no surprise that smaller funds have
closed at a greater rate than their larger
counterparts, likely for economic reasons. The fee
revenue generated through the management
of smaller funds may not cover the costs of
running the portfolio. When we compared closed
funds' average assets 12 months before they
closed with the average assets of all other funds
on the market that year, the difference is
substantial (see EXHIBIT 2 ).
Fund Closures by Year
Number of Closures
1,000
800
600
400
200
2005 '06 '07 '08 '09 '10 '11
Source: Morningstar Direct. Data as of 12/31/2020.
'12 '13 '14 '15 '16 '17 '18 '19 '20
Ratio of Fund Closures/Openings
1.5
1.43
1.2
0.9
0.6
0.3
EXHIBIT 2
Average Fund Size 12 Months Before Close vs. Average Fund Size
Average Size Closed Funds 12 Months Prior
Average Size All Funds
$1.5B
1.0
0.5
2006 '07
'08
'09 '10
'11
Source: Morningstar Direct. Data as of 12/31/2020.
'12
'13
'14
'15
'16
'17
'18
'19
'20
Fund Performance
The universe of funds we examined spans a wide
range of asset classes and styles. As such,
looking at Morningstar Category-relative total
returns can help control for differences in
asset class and style exposure when assessing
performance as a factor that might influence fund
closures. We sorted shuttered funds into
quintiles by how well they performed over their
lives relative to their category peers; the
best performers land in the first quintile of their
respective category and the worst in the
fifth. A clear relationship emerged between
category-relative performance and fund closures.
About 12% of all closed funds landed in
the best-performing quintile of their respective
category, while 39% came from the worstperforming
quintile.
Further analysis revealed a similar relationship
between funds that close and their categoryrelative
performance over their final 12 months.
This relationship may prove more useful for
spotting funds that are not long for this world.
Trailing performance over the prior 12 months
could be combined with the other characteristics
examined here in assessing how likely it is
that a fund will shut down.
Fund Provider
Funds' proclivity to close may also be influenced
by their parent. Different approaches to product
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