How Mutual Funds Change Benchmarks to Manipulate Performance

Investors allocate capital to mutual funds based on past performance and the perception of whether a fund can “beat the market.” In fact, mutual fund companies explicitly promote their funds based on these factors, knowing that investors will respond. The Securities and Exchange Commission (SEC) requires mutual funds to disclose at least one “appropriate” broad-based market index to which they compare their past performance. The stated rationale for this requirement is to help investors evaluate “how much value the management of the fund added by showing whether the fund outperformed or underperformed the market.”[1] As with all SEC rules … Read more