What’s In a (Mutual Fund’s) Name?

From last weekend’s Barron’s:

With nearly half of the companies in the Standard & Poor’s 500 paying a dividend yield greater than the 10-year Treasury bond’s recent 2.11%, investing in dividend-oriented mutual funds would seem like a good idea. But many funds promise more than they deliver, and investors are apt to be disappointed with the yields they offer.

Only 46% of open-end equity funds with “dividend” or “income” in their name actually have a 12-month yield greater than the S&P 500’s average of almost 2% in the same span, according to Morningstar. Part of the issue is nomenclature: Some dividend funds aren’t focused on yield as much as dividend growth, or the potential for so-so yields to increase consistently over time. The premise is that companies able and willing to up their payouts on a steady basis have solid or improving business fundamentals, and could generate strong stock returns.

I have a feeling many of the owners of these “dividend” or “income” funds would be surprised to hear that they could be getting a higher yield in an S&P 500 index fund. It’s not surprising that the fund companies are trying to sell the appeal of dividend-producing funds, even if the funds don’t actually do what their name implies.

The smart beta revolution has led many investors to search for low volatility stocks because they have produced above average risk-adjusted returns in the past. Many of these stocks are dividend-paying companies. Retirees are also desperate for yield, so anything with dividend or income in the fund name is sure to get their attention.

Unfortunately, Wall Street’s team of marketers and salespeople know that investors look at the names of the funds when making their investment choices. And when they don’t like how the fund’s name is currently working, they can always change it. Every month in the Mutual Fund Observer, David Snowball lists each of the funds that have decided to change their name to try to drum up more interest.

A few selections from last month’s edition:

Around May 1, the $6 billion ClearBridge Equity Income Fund (SOPAX) becomes ClearBridge Dividend Strategy Fund. The strategy will be to invest in stocks and “other investments with similar economic characteristics that pay dividends or are expected to initiate their dividends over time.”

Effective May 1, 2015, European Equity Fund (VEEEX/VEECX) escapes Europe and equities. It gets renamed at the Global Strategic Income Fund and adds high-yield bonds to its list of investment options.

On April 30, Goldman Sachs U.S. Equity Fund (GAGVX) becomes Goldman Sachs Dynamic U.S. Equity Fund. The “dynamic” part is that the team that guided it to mediocre large cap performance will now guide it to … uh, dynamic all-cap performance.

I love the fact that Goldman Sachs changed the name of their fund to include the word “dynamic.” Sure, that’ll do the trick. A few other names and descriptive terms the fund companies use to try to get your attention:

  • Enhanced
  • Unconstrained
  • Ultra
  • Moderate
  • Aggressive
  • Core
  • Opportunities
  • Efficient
  • Thematic
  • Prudent
  • Inverse
  • Tactical

This is fairly basic advice, but with the coming wave of active and smart beta ETFs, it’s a good reminder to do your homework when buying any fund. You can’t simply look at the title and assume that the fund will follow through with the strategy implied by its name.

March Mutual Fund Observer
Wanted: A few good dividend funds (Barron’s)


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  1. Ryan commented on Mar 10

    I’ve always wanted to do an analysis of fund name vs AUM and see if certain words sell better but haven’t gotten around to it.

    • Ben commented on Mar 10

      That would be really interesting. I have to imagine that these fund companies have done something like that before. I’ve seen other studies that show that easy to pronounce stock names and tickers are more appealing to investors.

  2. Jim Haygood commented on Mar 10

    One reason it’s tough for dividend-oriented funds to match the S&P’s dividend yield is fees. The second and third largest dividend funds listed at etfdb have expense ratios of 0.40% and 0.35%. With the S&P yielding only 2%, fund expenses eat up 20% of the yield from the get go.

    • Ben commented on Mar 10

      Great point. Another good reason to watch your fees I guess. I was still surprised by that number.