,

Mutual Fund Names are Confusing

It never ceases to amaze me how confusing and non-descriptive mutual fund names can be. I spend a lot of time studying mutual funds and searching for the ones to fit our clients’ needs. How does the average 401(k) participant or Do-It-Yourself investor select mutual funds with names that are not only confusing, but often, downright misleading? I will try not to pick on any specific fund because honestly, there are some good funds with terrible names. Here are some of the misleading terms that bother me the most:

  1. Global vs. International – In the mumbo jumbo of investment nomenclature, Global funds have U.S. and International holdings, while International funds have no U.S. holdings. I think the ambiguous terms lead a lot of investors to believe they have more exposure to international stocks or bonds than they actually have. There are 822 mutual funds in the World Stock category with the word “Global” in the title. These funds have on average 48% invested in U.S. stocks.

 

  1. High-Yield – After the junk bond crisis in the 1980’s, risky bonds with low credit ratings were rebranded as “High-Yield”. Who doesn’t want a high-yielding bond fund? When I see high-yield bond funds in 401(k) lineups, I cringe to think that participants are selecting the fund without understanding they are investing in risky bonds. As recently as December 2015, the Third Avenue Focused Credit Fund (no mention of high-yield or junk bonds in this name) failed to meet investor requests for distributions and collapsed. I think the term high-yield should be banned, but until that happens, remember that High-Yield = High Risk.

 

  1. Growth / Aggressive Growth / Capital Appreciation – Everyone wants growth in their portfolio. That’s why this term, that refers to a style of stock investing focused on earnings growth is misleading. Growth-style investing has long periods of both outperforming and underperforming the market. The burst of the dot-com bubble is an example of a long period of underperformance for Growth stocks. Some funds amp up their name by adding “Aggressive” to the title. And then there is my all-time favorite term, “Capital Appreciation.” I don’t think it means “admiration for uppercase letters”, and it does nothing to clarify the type of investments in a fund.

 

  1. Equity Income – On the other hand, everyone wants income in their portfolio, too. This term is used to describe funds that invest in dividend paying stocks and/or certain bond investments. Usually funds with this moniker fall into Value-style investing, but not always. We eschewed the terms “equity” and “fixed income” in our client reports several years ago in favor of using “stocks” and “bonds”.

 

  1. Total Return – Total return is a popular name for bond funds. Most of these strategies invest in a diversified mix of government bonds, agency mortgages, corporate bonds, commercial mortgage-backed securities, and asset-backed securities. PIMCO Total Return was once the world’s largest bond fund, with more than $300 Billion in assets. There are 315 funds bearing the moniker Total Return today. They include funds that invest in intermediate bonds, balanced allocation funds, large cap value stocks, world bonds, and alternative strategies. Total return is a term that indicates yield + price appreciation, and is applied to stock investment strategies as well.

Over the years, I’ve seen a lot of interesting mutual fund names. One of my favorites is the James Balanced: Golden Rainbow Fund. According to the fact sheet, the Golden Rainbow fund “seeks to provide total return through a combination of growth and income and preservation of capital in declining markets.”  I like rainbows, and I like to visualize the gold, guarded by a leprechaun, at the end of the rainbow. Honestly, I’m a bit disappointed that this name is taken in case I ever manage a mutual fund.

 

Post Script:

I noticed that Ben Carlson of “A Wealth of Common Sense” also wrote on this topic back in 2015. He has an interesting take on the marketing aspect behind fund names. I recommend you read his blog as well:

http://awealthofcommonsense.com/2015/03/whats-in-a-mutual-funds-name/

1 reply

Trackbacks & Pingbacks

  1. […] Mutual fund names confuse as often as they illuminate. (thirtynorth) […]

Comments are closed.