Monday, November 5, 2007

Why did My Mutual Fund Change its Name?

I used to hold mutual funds in an employee savings plan. The first time that one of the funds I held changed its name, I was puzzled. Was I switched to a different fund? Why was this done?

I asked the representative of the firm that managed our savings plan about this. He said I shouldn’t worry because the name change was inconsequential, and this seemed to be true. The number of units I held and their approximate value didn’t change. What was the point of all this?

After comparing my last two statements, I did find one seemingly small difference. The part of my most recent statement with the 1-year and 5-year performance of my fund was blank. The previous statement listed these returns for the old fund name, and the returns weren’t very good compared to other mutual funds.

Erasing History

The purpose of the name change was to erase an unpleasant history and start over. Because of this little trick, mutual fund lists are purged of their poorest performers. There are definitely funds that do badly, but their records go away after a while.

This leads to what is called survivorship bias. If you calculate the average 5-year return of all mutual funds, you will get a percentage that is higher than the real returns seen by investors, because the bad returns are missing from the average. I guess my investing performance would look a lot better too if I could eliminate all my bad investments.

So, if your mutual fund changes its name, odds are that you’ve lost some money. Erasing the history of this loss will help you forget about it, but the money will still be gone.

1 comment:

  1. But at least my Mutual Fund will have a cool new name, maybe they'll send me a "free" mouse pad with the new name too!

    ReplyDelete