This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Among the games that mutual fund managers play to artificially boost reported returns, such as closing underperforming funds and fund incubation , you can add a practice called front running. Larry Swedroe describes front running in his excellent book Rational Investing in Irrational Times . A fund family starts up a new fund hoping to report good returns and attract a flood of investors. They begin by choosing some stock that has low trading volumes so that a modest size purchase will drive its price up sharply. The fund family then purchases a block of shares for the new fund. Then they purchase a larger block of shares for one or more of their large established funds. This will drive the price of the shares up and artificially inflate to apparent returns of the new fund. Done correctly, the number of shares purchased for the established fu...

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 T...

In part 1 , I explained why the average professional money manager doesn’t get better returns than the stock market averages. Once we take into account the high costs charged by professional money managers, we find that index funds beat most actively-managed mutual funds. However, it is possible to find analyses within the mutual fund industry that seem to contradict these conclusions. This is because mutual fund lists contain only those funds that are still active. Poorly-performing funds get closed or merged with other funds . Wouldn’t it be nice if we could all throw out our worst performances? “Judge, I’d like to point out that that in 3 out of 5 football games I attended this year, I didn’t go streaking onto the field.” If we calculate average mutual fund returns after throwing out bad funds, we get an artificially inflated average return that is higher than the returns investors actually received. This is called survivorship bias. In the book “A Random Walk Down Wall Street...

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 th...