Monday, May 18, 2009

Why did My Mutual Fund Change its Name?

Happy Victoria Day! This is a special edition of the Sunday feature that looks back at selected articles from the early days of this blog before readership had ramped up. Enjoy.

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. Amazing. This is kind of like people that commit some heinous crime and then move away and change their name to evade detection.

  2. Gene: You're right. I'm guessing that moving away and taking on a new identity is harder now than it used to be. Electronic records tend to follow you around. There is no sign that burying the bodies of poorly-performing mutual funds is getting any harder, though.

  3. Actually this mostly happens when there is a legal merger of funds or a change in mandate

  4. Anonymous: You are likely correct, but it is primarily the poorly-performing funds that seem to require legal mergers and changes of mandate. Survivorship bias calculations done by many researchers confirm that disappearing funds underperform the average fund by a wide margin.


    Most mutual funds (approx 75% in any given year, more than 90% over 10 years) underperform broad based stock market indexes. Most stocks underperform the indexes they are members of. A little algebra suggests...what?