The performance and externality via fund of fund structure：Evidence from life-cycle fund

• Main Authors: Yu-Hsuan Chiang, 江育萱
• Other Authors: Hui-Wen Lai
• Format: Others
• Language: en_US
• Published: 2011
• Online Access: http://ndltd.ncl.edu.tw/handle/14941653392247898311

碩士 === 元智大學 === 財務金融學程 === 99 === Life-cycle fund is the most popular and relatively new retirement vehicle nowadays. In practice, the majority of life-cycle funds are built on fund-of-fund structure, and the component funds of the life-cycle funds are selected from the same fund family. This study contributes to provide in-depth examination by exploring the possible conflicts of interest embedded in such fund-of-fund structure of life-cycle funds. Firstly, this study investigates the performance of the life-cycle funds'' component funds in comparison with the external mutual funds. Secondly, incorporating family-member funds into a life-cycle fund is similar to re-packaging the existing funds of fund family and re-selling them to new investors through life-cycle funds. Thus the second purpose of this study is to examine the spillover effect associated with incremental cash flows of components funds resulting from the inflows of life-cycle funds. Thirdly, the fund-of-fund structure binds together investors with different investment horizons, where life-cycle fund investors have longer investment horizons and less liquidity needs than component fund investors. The third purpose of this study is to examine the externality associated with the negative effect of liquidity-motivated trading in component funds on the return performance of life-cycle funds. Overall, this study finds that life-cycle funds exhibit an under-performance pattern, implying that incorporating family-member funds into a life-cycle fund damages retirement savings in the long run. In addition, the heavy outflows of component funds will lead to the inferior performance of the life-cycle fund in the next period, which is the liquidity cost resulting from pooling investors with different investment horizons.