Advertised and Actual Investment Returns for Mutual Fundson February 23rd, 2011 at 11:41 pm
The Securities and Exchange Commission (SEC) requires that mutual funds that advertise their investment performance use a standardized formula – although that formula may show returns that are substantially higher that the returns actually experienced by shareholders in the funds. There is generally a gap — often a large gap — between a fund’s advertised SEC-performance and shareholders’ actual investment returns because the period during which shareholders hold their shares often does not match the period for which performance is measured. For example, a $1 million fund may have a 100% return in one year, and negative 50% the next year, leaving its 2-year, advertised SEC-performance at 0%. But the first year’s 100% performance may have attracted $50 million in new assets at the end of the year. The value of their accounts would drop to $25 million during the second year. So the initial $1 million in accounts experienced the advertised 0% return, the $50 million in accounts that were a bit late to the party experienced a 50% loss. Funds are not required to disclose their performance gap, that is, the difference between their advertised SEC-performance and the actual returns experienced by their shareholders. This difference may be attributable to new assets being attracted by the fund’s own advertising of stellar performance. A study of the relationship between fund advertising and the size of their performance gaps might generate some interesting data.