Funds that have more complicated names perform worse than less-wordy peers, study finds
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- A mutual fund's name length can indicate how well it performs, a study led by Derek Horstmeyer found.
- Funds with more complicated names tended to do worse than funds with simpler names.
- One possible reason is that complex-named funds are more speculative and use buzzwords to attract investors.
A mutual fund's name may now become an additional point of consideration when investing.
That's after a George Mason University study found that actively managed funds with more complicated names mostly saw smaller pre- and post-tax returns than those with simpler names.
"When it comes to names of new mutual funds, more is often less," finance professor Derek Horstmeyer wrote in the Wall Street Journal.
The study grouped a number of active funds into eight asset classes. Then, each classes' sample was further categorized by the complexity of their name, based on word count, character count and average word length.
The funds were then divided into "complex" and "noncomplex."
Calculating the median 10-year returns of each fund, the noncomplex groups outperformed complex ones in seven out of the eight asset classes.
Of the seven noncomplex funds that beat complex funds, the average difference was 0.37 percentage point. And in most cases, post-tax returns showed a bigger gap.
Only large-cap equity funds saw the reverse of this, where complex funds outdid the simpler-named funds by 0.47 percentage point.
Horstmeyer provided a few theories as to why more verbose names tended to underperform.
One possible explanation may be that more complicated names may be a byproduct of the more complex strategies that certain funds are attempting, many of which often underperform. Horstmeyer points to complex-named funds that tend to trade more, while practicing less tax efficiency.
Another explanation could be that complex-named funds may simply be more speculative, leaning on buzzwords to attract investors. That's compared to shorter-named funds, which could be more established. Such funds would benefit from long-standing track records and experienced managers.