Why Do Fund Families Release Underperforming Incubated Mutual Funds?

Although the average incubated mutual fund outperforms nonincubated funds by up to 3.41% annually, a large number of released funds underperform during incubation. We find that launching underperforming incubated mutual funds is associated with objectives that attract large inflows and lower relative risk. These findings are consistent with the use of incubation to maximize fee revenue through means other than the flow-to-performance relationship. We also find that underperforming incubated funds are incubated longer suggesting that families release funds opportunistically to take advantage of outperformance when it is observed.