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Risky fund family ties
First, a little “Investing 101.” A mutual fund family is a group of mutual funds that is managed by the same company. It is usually easy to switch money between mutual funds that are part of the same family. Fund families, such as Vanguard, Fidelity, and Scudder, are popular among investors.
They may promise ease of use, but from the standpoint
of investor welfare, are fund families a smart move? Not always, says
T. Clifton Green, an assistant professor of finance
at Goizueta, who suggests that keeping investments in the family can increase
risk, reduce diversification, and threaten returns. Green spells out those
findings in “The Impact of Mutual Fund Family Membership on Investor
Risk,” a study he co-authored with Edwin J. Elton and Martin J. Gruber,
both Nomura professors of finance at New York University’s Stern
School of Finance. The mutual fund family research was spotlighted at
the end of December in a Wall Street Journal article, “Diversifying
Fund Families Is Key.”
For their study, Green and his colleagues examined 998
different mutual funds, spread across 100 different fund families, from
1998 to 2002. “We look at how similar the funds are in terms of their
returns and their stock holdings,” explains Green “It turns
out that if it’s in the same family, their returns and their stock
holdings are noticeably more similar.” The key finding: restricting
investment to one fund family leads to a greater total portfolio risk
than diversifying across fund families.
Investors beware, cautions Green. Just because the name
is different doesn’t mean that you are holding a different fund if
it’s within the same family. Instead, Green suggests studying the
correlation of monthly returns over a five-year period; checking to see
if the funds are handled by the same portfolio manager; and looking at
the rank order of major holdings in the funds in terms of differences
in the percentages invested.
For the full story, see the latest issue of Knowledge@Emory at http://knowledge.emory.edu. Non-registered users should click on “sign up” on the homepage for free registration.
—Diana Drake