Fund Measure Switcheroos Too Common?

Getting less attention than it should in our roiled stock market killing many fund investors is WSJ’s “How to Beat Stock Market Without Lying,” aka “How investment firms fudge fund performance simply by shifting baselines.

The Intelligent Investor column put it succinctly this way: “Stock funds have been pulling a switcheroo to make their returns look better: When they don’t measure up, they change how they measure.” The maneuver is “perfectly legal.” Fund managers have been easily beating the market by changing the market they’re telling investors they’re trying to beat. The swing of .5 to 1.5% can have of course dramatic influence on potential investors looking for their portfolio’s best aka most lucrative return option. According to WSJ, “Funds that change benchmarks take in an average of $70 million more in new money over the ensuing five years than funds that didn’t switch – even though performance doesn’t improve.”

How persuasive is the technique? A new study by professors Kevin Mullally of Central Florida University and Andrea Rossi of the University of Arizona finds that “between 2006 and 2018, 37% of all US stock mutual funds pulled this kind of switcheroo.” So now, you know?

Davd Soul