If you’re a longtime reader of Richard C. Young’s Intelligence Report, you’ll remember that KISS is an acronym for a basic tenet of his style of investing: Keep It Simple Stupid. Your Survival Guy was perusing The Wall Street Journal this morning when I found a piece I enjoyed highlighting a warning sign for investors looking to “keep it simple.” The Journal’s Derek Horstmeyer explains that even a complicated fund name may be a red flag. He writes:
When it comes to names of new mutual funds, more is often less.
As mutual-fund companies continue to introduce new products, they often assign the funds longer and more-complex names. This could be because the companies want to attract attention to the funds, or because all of the simple fund names have already been taken.
We decided to take a look at whether fund-name complexity relates at all to the performance of the fund. We found that the more complex a fund name, the lower its pretax and posttax returns, compared with returns of similar types of funds with simpler names.
Two large funds companies declined to comment on our study. But we offer several possible explanations as to why funds with long names could be associated with lower returns. One, fund companies continue to try out funds with more-complex strategies (hence, more-complex names), which often do not work flawlessly and hence underperform on average. We see evidence of this in complex-named funds that execute more trades and so are less tax efficient.
Another possible explanation is that the short-named funds are older and more established—with strong track records and proven managers. The complex-named funds, by contrast, are more speculative, using buzzwords to try to attract inflows to them.
Action Line: When you’re ready to Keep It Simple, let’s talk.