Download This PaperMoving the Goalposts? Mutual Fund Benchmark Changes and Relative Performance Manipulation
68 Pages Posted: 11 Jul 2022 Last revised: 16 Oct 2023
Date Written: October 13, 2023
Abstract
We analyze changes to mutual funds' self-declared benchmarks using hand-collected data from funds' prospectuses. Under existing rules, funds can freely change their benchmark indexes and, implicitly, the historical returns to which they compare their past performance. Funds exploit this loophole by adding (dropping) indexes with lower (higher) past returns, which materially improves the appearance of their benchmark-adjusted returns. High-fee funds, broker-sold funds, and funds experiencing poor performance and outflows are more likely to engage in this behavior. These funds subsequently attract additional flows despite continuing to underperform their peers.
Keywords: Mutual funds; disclosure; consumer protection; misconduct; forensic finance
JEL Classification: G11, G14, G23, G53
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