A. Colin Cameron and Anthony D. Hall
"A Survival Analysis of Australian Equity Mutual Funds"
Australian Journal of Management, September 2003, 209-26.
Determining which types of mutual (or managed) investment funds are good
financial investments is complicated by potential survivorship biases.
This project adds to a small recent international literature on the patterns
and determinants of mutual fund survivorship. We use statistical techniques
for survival data that are rarely applied in finance. Of specific interest
is the hazard rate of fund closure, which gives the variation over time in
the conditional probability of fund closure given fund survival to date.
For a sample of 251 retail investment funds in Australia from 1980 to 1999 we identify a hump-shaped hazard function that reaches its maximum after about five or six years, a pattern similar to the UK findings of Lunde, Timmerman and Blake (1999). We also consider the impact of monthly and annual fund performance (gross and relative to a market benchmark). Returns relative to the benchmark are much more important than gross returns, with higher relative returns associated with lower hazard of fund closure. There appears to be an asymmetric response to performance, with positive shocks having a larger impact on the hazard rate than negative shocks.