What's in a Name? Plenty for Mutual
Funds --- Portfolios That Change Monikers Attract More Investor Money
Than Those That Keep Old Ones
14 March 2003The Wall Street Journal
(Copyright (c) 2003, Dow Jones & Company, Inc.)
AS IF CHASING PAST
RETURNS wasn't risky enough, it turns out mutual-fund investors are also
plenty willing to chase pretty-sounding names.
A new academic study
shows that funds can attract investors in droves simply by adding trendy
words to their monikers -- even such mundane labels as "large,"
suggesting that a fund might invest in large-company stocks.
The academic research
highlights the degree to which fund investors are susceptible to the
marketing stratagems used by fund companies, which stand to boost their
own profits by increasing the assets in their funds.
Indeed, funds that change
their names were found to attract 22% more new money than funds of
similar size, investment style and other features that don't undergo a
name makeover. And that is true even if the name changes are purely
cosmetic, without significant change in the way the fund invests.
"It's like saying by
suddenly changing your name, you're a better fund," says P. Raghavendra
Rau, a management professor at Purdue University in West Lafayette,
Ind., who co-wrote the paper. That is obviously not a rational
conclusion. "If I call myself Brad Pitt, for example, it shouldn't make
me more attractive to women," Prof. Rau says.
Critics say mutual-fund
companies sometimes make marketing moves that play to investors'
emotions but end up costing them money. As Internet stocks soared in the
late 1990s, for instance, many companies rolled out specialized
Internet funds and other new technology funds that ended up being among
the biggest losers when the bubble burst.
In recent years,
academics have been zeroing in on just what it is that induces investors
to turn over their money to a particular fund and the degree to which
those factors actually help -- or hurt -- the investors' fortunes. Here
is some of what they have found.
What's in a name: It is
taken as a truism in financial circles that investors will flood funds
or investment categories that have performed well in the preceding
months or even years. Technology funds, for example, drew $4.1 billion
in new money in the six months after the Nasdaq Composite Index peaked
in March 2000.
But according to the
study by Prof. Rau and two other academics -- Michael J. Cooper, also of
Purdue, and Huseyin Gulen of Virginia Polytechnic Institute --
investors also will pump money into funds that simply sound like they
belong in a hot category. Just adding "growth" to a fund's name when
fast-expanding growth stocks are outperforming discounted value stocks
often would do the trick, they found.
Funds amending their
names reaped an average of $67 million more than similar funds over the
course of the next 12 months following the name change, with funds
hewing to hot trends getting most of the gain, the study found. On
average, the funds studied each had assets of $299 million, so the new
money amounted to a significant increase in the funds' coffers. All
told, during the seven years from 1994 through 2001, 296 funds raked in
some $19.9 billion in additional money that could be attributed to name
changes, the paper says.
For example, the $9.5
million AIM Small Cap Equity Fund changed its name to the AIM Small Cap
Growth Fund in September 1998; over the next year, the fund drew in $189
million in new investment, though it is unclear how much can be
attributed to the name change. AIM notes that the fund had recently been
acquired and was renamed to reflect a new growth-oriented style, just
as that style caught on and began attracting investors. "We don't change
a name to stimulate growth of assets," a spokesman said.
researchers found that it made little difference whether funds actually
changed their investment strategies to match their name changes. In
fact, what did make a difference was how much funds raised their
so-called 12(b)1 fees, which are largely devoted to marketing spending,
and how much they levy in one-time sales charges, or loads. The more
these expenses rise, the more new money the funds making name changes
were likely to attract, according to the study.
Style and substance: Of
course, fund-industry officials have known for a long time that the
choice of names can sway investors' fund selections. Over the years,
some funds had altered their names without altering their portfolios (or
kept their names as is while altering their portfolios) to the point
that fund names and the securities in their portfolios sometimes bore
little resemblance to one other.
So in 2001, the
Securities and Exchange Commission adopted regulations requiring many
funds to invest at least 80% of their assets in the type of securities
their names suggest, up from the previously required 65%. More than
2,000 fund share-classes changed names in 2002, excluding changes that
were the result of mergers, according to Morningstar Inc.
The study by the
professors at Purdue and Virginia Tech in Blacksburg, Va., isn't the
first to show that investors are attracted to funds that advertise more
heavily or that are promoted by commission-paid brokers and financial
advisers. But often, the true cause and effect is fuzzy, says Erik R.
Sirri, an associate professor of finance at Babson College in Wellesley,
For one thing, fund
companies tend to advertise their most successful funds by touting
glowing investment returns. That leaves open the question of whether
investors flock to funds that are advertised heavily, or to funds that
perform well, because they tend to be the same funds, according to Prof.
Prof. Rau says he and his
colleagues have shed some light on that question because the
name-changing funds tracked in their study weren't the top performers.
Indeed, in most respects they were average -- except that investors were
withdrawing money from them up until the name change. Until that point,
"They have really lousy fund flows compared to other funds," Prof. Rau
says. "It seems to me they are doing this to take advantage of hot
styles and cold styles."
Investors can look beyond
fund names to examine actual portfolio holdings with the help of
investment-tracking services available at such Web sites as
All in the family: Not
only can a hot fund attract piles of money from investors, but fund
companies sponsoring top-performing portfolios also draw money to other
offerings in their fund lineup that have mediocre performance, according
to research co-written by researchers Vikram Nanada, Z. Jay Wang and Lu
Zheng at the University of Michigan in Ann Arbor. In a working paper,
"Fund Families and the Star Phenomenon," they looked at money flowing in
to individual funds at families sponsored funds with top performance
The researchers suspect
that advertising is the link. "If you have a star fund in the family, it
helps to attract money to other funds as well," says Prof. Zheng. "By
running those ads, they somehow enhance the brand name of the whole
family, so other funds benefit."
your money among both a family's star fund and its less stellar siblings
on balance delivers only average returns. "If we invest in star
families, do we do better than average? The answer is no," Prof. Zheng
says. As a group, the funds of families boasting star funds don't
perform any better than the funds of other fund families.
On the other hand,
investing across the board in the "star" families "doesn't hurt
[investors] much either; performance is just about average," Prof. Zheng
But before investors go
chasing after the hot fund category du jour, they should know that going
with the flow of new cash can be hazardous, says Russ Wermers, a
business professor at the University of Maryland, which is based in
Specifically, attracting a
lot of money probably isn't a good thing for those already invested in
an actively managed fund -- until that money is put to work, it drags on
the fund's performance in a rising market, Prof. Wermers says. "When a
manager gets hot and does well, these flows come in and push [the
manager] out of the market for a while, and that hurts performance
Indeed, some research
suggests that this "drag" accounts for much of the gap between the
performance of actively managed funds and index funds, Prof. Wermers
JANUS SHARE SHUFFLE:
Shares in money-management firm Janus Capital Group rallied after the
company announced its executives and portfolio managers had converted
their shares in the company's major subsidiary to shares in the parent
The Denver company's
shares were up $1.09, or 11%, at $10.95 in 4 p.m. New York Stock
Exchange composite trading, after the firm, which used to be known as
Stilwell Financial Inc., said the transfer of shares would be "modestly
accretive" to diluted earnings this year.
The transaction resulted
in private shares of subsidiary Janus Capital Management LLC converting
to approximately 15.7 million shares of the parent company, or 7.5% of
the shares outstanding. The step will help diluted earnings by lowering
the company's effective tax rate. Janus shares fell earlier in the week
after the company reported assets under management fell 2.9% in February
to $132 billion, larger than drops in major market indexes. The company
said the retreat was due to market depreciation and outflows in
institutional money markets.
-- Yuka Hayashi
Journal Link: See two
academic studies that shed light on how mutual-fund names and
performance influence where investors put their money, in the Online
Journal at WSJ.com/JournalLinks.
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