May 4, 2020
Dear Commission, We read your request for comments on fund names (File No. S7-04-20) with great interest. As researchers from the University of KU Leuven (Belgium) and the University of Zurich (Switzerland), we are very interested in this issue and are currently investigating this topic. Like you, we are convinced that the name of a fund is an important piece of information for investors, and anecdotal evidence suggests that the name of a fund may indicate a strategy that is different from the actual investment strategy that the fund pursues. Therefore, with this email, we would like to share some of our preliminary results with you and we look forward to hearing from you on this object. In our study, we investigate the historical fund names of US equity open-end mutual funds between 2010 and 2018, consisting of 2,166 funds. Our name analysis further focuses on names using the words "small-cap" or "large-cap" (i.e. Size names) and the words "growth" or "value" (Style names). Roughly 61% of the funds in our sample have such names. Our study finds the following: - Using a clustering classification method, we find that for a significant fraction of mutual funds there is, at least once in their life-cycle, a mismatch between the fund’s name and the fund’s strategy. 716 funds provide an inaccurate name for at least one quarter; some of them are even found to have an inaccurate name for as much as 8 years. - On average, we observe 200 inaccurate fund names in each year with a slightly decreasing trend over time. - Differentiating between the funds with Size names and the funds with Style names reveals that around 80% of the misclassified observations are coming from the Style names. This is interesting and not surprising given that, according to Rule 35d-1, Size names must be used in a "reasonable manner" while there does not exist a clear restriction for Style names. - Funds with an inaccurate name experienced lower fund inflows in the quarters before having an inaccurate name, belong to smaller investment companies, and take less risky investments. Moreover, we find that the older and the more expensive a fund is, the higher the probability is that it has an inaccurate name. - When analyzing investors' responses to inaccurate names by measuring the fund net flows, we find that, on average, investors continue to decrease their investments in these mutual funds. Please note that these findings are only preliminary. We wanted to share them with you as we hope that this could be the start of further exchange of ideas between the Commission and ourselves. Moreover, do not hesitate to contact us if you have further questions with respect to our analysis and if you are interested in the full results of our study. We are looking forward to the opportunity to share our results in greater detail and to discuss possible ideas for further analysis. We look forward to hear from you. Best regards, Kristien Smedts, KU Leuven Anne-Florence Allard, KU Leuven Jonathan Krakow, University of Zurich Prof. Dr. Kristien Smedts Professor of Finance | Department of Accountancy, Finance and Insurance | Research Centre Finance Director Doctoral Studies Faculty of Economics and Business Economics | Academic Coordinator PhD in Business Economics Faculty of Economics and Business | Campus Leuven