The rush by investors to a newly dubbed fund is especially meaningful in funds that make a “hot style” name change – that is funds that add the latest investing trend to their title. These funds earn cumulative flows of 30% in the year after the name-change month, 26% more than funds making cold style name changes, according to research conducted by a trio of finance professors Michael Cooper and P Raghavendra Rau, both of Purdue University, and Huseyin Gulen of Virginia Tech.
Further, the year before a fund changes its name to reflect a current hot style or moves away from a current cold style, the fund experiences an average excess outflow of approximately -5%. Yet, the inflow of investments occurs independently of performance compared to the fund’s returns pre-name change. This, the researchers say only fuels the growing fire among financial think-tanks that investors are “irrationally” influenced by cosmetic effects.
Increased inflows do not necessarily mean that investors are responding to name changes alone. With a name change, some funds also alter their investment strategies, so investors might have been reacting to those new strategies. Yet, while some renamed funds did change their investment approaches, the researchers found that many others did not. And the assets of both types grew at similar rates after the name changes.
The researchers also looked at the possible role of advertising but found further evidence that investors were reacting primarily to the name changes alone. Though funds that increased their ad budgets had higher inflows, so did funds that did not increase their advertising, as well as those with no advertising budget at all.
Funds though could simply point to performance after a name change and argue that the move was more than cosmetic, the researchers acknowledged. But turning back to their slide rules, the trio found this was hardly the case. Each fund the groups studied was matched up with a control group of funds that owned similar stocks, as indicated by factors like market capitalization and the ratio of price to book value. On average, the research concluded the renamed fund lagged behind its control group by 2.3% over the year after its name change.
The average fund in the study had $299 million in net assets when it changed its name. Overall, the findings mean that one year later, the average fund had $65 million more assets than if it would have had by keeping its old name. Across all 296 funds in the sample, that translates into a total shift of more than $19 billion. A copy of the complete 46 page study can be found at papers.ssrn.com/sol3/papers.cfm?abstract_id=423989 .