How mutual fund companies bury their mistakes

The mutual fund industry has an open secret: each year it buries hundreds of funds that couldn’t make it. Some of these funds were small unknowns while others were yesterday’s popularity club winners, unable to repeat their success in changing markets.

Remember Munder funds and Amerindo funds, two big technology and Internet stock investors of the late 1990s? Well, only three years after launching the Munder Bio(Tech)2 fund, Munder is merging it with another health care stock fund. Amerindo is folding its Internet B2B fund (that was the jargon for “business to business” internet commerce) and its Health & Biotechnology fund into its Amerindo Technology fund.

Burying mistakes makes mutual fund companies and mutual fund categories look better. A survey of existing technology stock funds shows that their average loss over the five years ended in 2002 was just 3.5% per year. That doesn’t look too bad, given the huge tech stock bear market. Add in the results of dozens of tech funds that closed during this period, however, and the average return drops to a loss of 7.7% per year.

Mutual fund investors can get a sense of which fund families are bringing out trendy—and questionable—funds by looking at their death rates. Over the past 10 years companies like Vanguard, with 10 fund closures, American Funds, with one, and T. Rowe Price, with five, have done well. Meanwhile, Dreyfus has killed 47 funds in the same period, Merrill Lynch dumped 42 funds, and Prudential jettisoned 41 funds.