What’s in a Name Change?

Have you ever notice how mutual funds sometimes change their names? Unfortunately, it is not always to the investor’s benefit. Forbes has an excellent article that explains the reasons and consequences of name changes.

The article says that there are three main reasons that mutual funds make name changes. First, they rename due to a change in their investment strategy. Second, the name change is simply the result of the words in the name having a negative connotation. And the third reason is to give the fund a more marketable name.

The author of the article, Shauna Carther, writes that there are usually two main consequences that are a result of a mutual fund name change:

1.Higher fees: If the fund has changed its name in lieu of a reallocation of assets, additional costs could incur from higher trading costs associated with reorganization of the portfolio, legal fees and advertising cost. These funds tend to have large 12B-1 fees, which go toward advertising and brokerage commissions.

2.An unsuitable investment portfolio: At one time it was not uncommon to see mutual funds change their name to reflect popular investment strategies rather than the mutual fund’s main investment goal. This kind of name change, however, is largely eliminated today by stricter SEC regulation (discussed further below). These purely cosmetic changes create problems for investors who are pursuing an investment strategy suitable for their current asset allocation goals.

Investors must look beyond the marketing material for mutual funds, or any other investment for that matter. See what the actual fund holdings are, know the expenses and see how the fund has performed in the past, especially during different types of markets. Know enough about the fund to understand what investment returns you can reasonably expect based on its past, whatever the name may be.