Moving the Goalposts? Mutual Fund Benchmark Changes and Performance Manipulation

54 Pages Posted: 11 Jul 2022

See all articles by Kevin Mullally

Kevin Mullally

University of Central Florida

Andrea Rossi

University of Arizona - Department of Finance

Date Written: June 24, 2022

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 performance. 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; misconduc

JEL Classification: G11, G14, G23, G53

Suggested Citation

Mullally, Kevin and Rossi, Andrea, Moving the Goalposts? Mutual Fund Benchmark Changes and Performance Manipulation (June 24, 2022). Available at SSRN: https://ssrn.com/abstract=4145883 or http://dx.doi.org/10.2139/ssrn.4145883

Kevin Mullally (Contact Author)

University of Central Florida ( email )

412 CBA
Orlando, FL 32827
United States
407-823-2360 (Phone)

Andrea Rossi

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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