Mutual fund survivorship bias

When my son was in second grade, one of his report cards was, let's say, not perfect. But he had been wise enough to pre-check the envelope before he brought it home. After he read the contents, it magically disappeared. He arrived home claiming there was no report card this quarter, sadly it had been lost.

Unfortunately for him, one of his sisters found it, a few days later, buried in the school's clothing lost and found.


Active mutual funds love to play this game with the public. If they do well, it makes the front page of the glossy marketing material. If the fund manager is dogging it, the firm is tempted to kill off the fund or, more commonly, merge it into another fund. This obscures the poor performance statistics.

It's their version of burying bad news in the lost and found, and it's misleading. This is called "survivorship bias," because only the survivors are factored into the reporting. Vanguard Research did a study on this trend, covering the years 1997 - 2011. They found:

  • Only 54% of funds managed to survive the full period.
  • 87% of merged funds underperformed prior to the merge date.
  • The act of merging funds did not improve performance in general.

The research firm Lipper also dove into this topic. From 1986 to 1996, 568 mutual funds were reported to return 13.39%. But when those same returns were reported a decade later, they had magically risen to 14.65%. How did the supposedly same group of funds, reported over the same time period, get a 1.26% improvement performance? In the later reporting period, there weren't 568 funds, there were only 434 surviving funds. Surprising no one, the 134 that had been liquidated or merged away were not the best performers.

Burton Malkiel, Princeton economics professor, opines: "if you look at results for dead funds as well as survivors, you show that mutual-fund returns are a lot lower than most of the published statistics." In fact, a study he did from 1982 to 1991 shows survivorship bias added 1.4% a year to published fund returns.

Perhaps Malkiel had his own experience with a lost and found long ago. He certainly knows where to look.

Sources:
WSJ: Dead-and-Buried Funds would alter averages
Vanguard: the mutual fund graveyard

Return to Articles
How We Are Different
Low-fee index funds. Transparent & fiduciary financial advisors.
Local Financial Advisor
We are in your community. We are local.
Investment Management
We tailor to each client. Index funds at the core.
Index Funds
Broad market exposure, low expense.
Dan's Corner
Meaningful musings from our founder.
Fiduciary
Your best interests are our priority.
Low Fees
Our fees are among the lowest in the nation.
Financial Planner
Financial advisor optimizes your financial picture.
U.S. Treasury Bonds
Use Treasury Bonds to reduce risk.
Book Recommendations
Here are some of our favorites
Who We Serve
We work with clients nationwide from all financial backgrounds.
When Should I Invest?
Life transitions = important financial decisions.
Retirement: 401k and More
Retiring? Plan the future you want.
IRA Rollovers
401k Rollovers. IRA Rollovers
Active vs. Passive Investing
We believe there is a winner in this debate.
The Investment Process
How we work: low-cost index funds, personalized attention.
Simplicity
Simplicity is the ultimate sophistication.
Investing: What to Focus On
Low-fee index funds. fee-only advisor.
Switching Financial Advisors
Can be uncomfortable, but an important step.
Advisor Recruiting
We attract top-tier talent. Not your usual firm.
Basic Investing
Let's start with Investing 101.
Understanding Your Financial Statement
Let's break it down to basics.
Taxes on Investments
What causes taxes within your investments?
Behavioral Finance
Nudge vs. Sludge.
Advanced Investing
Let's geek out on stats and figures.
How Financial Firms Bill
Fee-based vs. fee-only, and lots more.
Who Supports Indexing?
Bogle, Swensen, Buffett, and others.
Transparency
One click to see our fees.
Mutual Funds vs ETFs
Clarifying the difference.
Does Stock Picking Work?
The resaerch says no.
Countering Arguments Against Index Funds
What happens in a down market?
Annuities
Lots of fees, little clarity.
How Do Mutual Funds Work?
Invest in the basket.
How to Relieve Financial Stress
New client? anxiety is normal.
Financial Terms Glossary
Common investment terms you should know.
Firm Comparison
One Day In July vs the competition.
Retired Investing
Retiring? Let us help.
Young Investors
Plant a seed, watch it grow.
High Net Worth Investors
Preserve and grow your wealth.
Investing an Inheritance
Prioritizing and planning for the future.
Frequently Asked Questions
Good questions, real answers.
Female Investors
Your voice needs to be heard. We are listening.
For the Business Owner
Choosing what's best for your business.
Environmental Investing
Carbon intensity, fossil fuels.

Locations

Vermont

Connecticut

United States

Services

Individuals

401k Plans

Institutions

Environmental

Account Types

Differentiators

Cash Flows

Low Fees

Fiduciary

Dedicated Advisor

Materials

Advisors: Join Us

Careers

Articles on Investing

About the Secure Act

Quarterly Booklets

Resources

Vermont Investment Management

Vermont Retirement Planning

Vermont Wealth Management

Vermont Financial Advisors

Investment Tools

Shelburne, VT Financial Advisor

Frank Koster | Josh Kruk | Keith McCarthy

5247 Shelburne Rd, Suite #101

Shelburne, VT 05482

(802) 777-9768

Stowe, VT Finanical Advisor

Available for meetings in Stowe.

Peter Egolf

(802) 999-2321

Burlington, VT Financial Advisor

Hans Smith | Katie Muttitt

Nancy Westbrook | Peter Egolf

77 College Street #3A

Burlington, VT 05401

(802) 503-8280

Darien, CT Financial Advisor

Available for meetings in Darien.

Keith McCarthy

(203) 554-9466


v 1.7.16 | © One Day In July LLC. All Rights Reserved.