Both conventional wisdom and earlier studies of mutual fund performance found that removing closed funds from performance databases raised the overall performance of the industry. However, a new study from Lipper demonstrates that this effect is much less profound than thought, and is primarily concentrated in certain investment styles, Reuters reports.
Removing funds that have been closed creates "survivorship bias," a phenomenon where only those funds healthy enough to survive are included in the industry averages. This culls out the weaker members of the herd, and authors of past studies have criticized the industry for deceiving investors with artificially inflated performance figures because of it.
"The difference between our study and prior studies is that we don't find survivorship bias quite as widespread," said Andrew Clark, senior research analyst at Lipper.
Previous studies only broke funds into categories of growth or value. Lipper's new study broke funds down into more fine-tuned categories such as capitalization size and style.
In fact, for global stock funds, mid-cap core funds and small-cap core funds, over a period between one and three years, survivorship bias was either completely absent or nominal, Lipper found.
Among large-cap growth funds, survivorship had an effect only in 2000 and 2001, but not in the years since then. Multi-cap funds did demonstrate survivorship bias at all points in time.
The reason that survivorship bias was not as important as first thought is because poor performance is not the only reason that funds are closed, Lipper concluded. Furthermore, in some periods, the funds that perished did better on average than the survivors.
This study is not earth-shattering for investors, but it is significant for scholars and fund executives who are looking to compare performance of their offerings with the industry,
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.