Mutual Funds minus 2000

by Doug on Dec.29, 2009, under Mutual Funds

More than 2,000 funds were liquidated or merged out of existence in 2009, the biggest downsizing of the fund industry in years. The polyglot of funds were mostly failures but some, although good, just didn’t gather a following. Many of the funds were target funds which are supposed to last until you retire.

Merging and liquidating funds is a way to make poor performers disappear so only the good ones survive. This makes the mutual fund company look better since their average return increases. This act is called survivorship bias.

For example, let’s say that there are three funds (A, B and C) in a given category. Fund A has a five-year annualized total return of 12%; Funds B and C have five-year annualized total returns of 8% and 4%, respectively. The average annual total return for the fund category would be 8%. But, if the loser, Fund C, were to be liquidated or merged into either Funds A or B, it would disappear and make the five-year average annual total return for the fund category 10%.

Regardless of the reason, survival of the fittest still remains the modus operandi.