Mutual Fund Name Changes

Cite this Article
Bill Sjostrom, Mutual Fund Name Changes, Truth on the Market (February 10, 2006),

Today’s W$J has an article about mutual fund name changes entitled “The Bull Market in Mutual-Fund Name Changes.” Last year 719 funds changed their names, up from 505 the year before. Some name changes are the result of acquisitions. For example, following the acquisition of various Strong mutual funds, Wells Fargo changed their names to include “Wells Fargoâ€? instead of “Strongâ€? (this was a no-brainer as Strong was embroiled in the mutual fund trading scandal). Many name changes, however, are pure marketing moves. For example, Merrill Lynch is re-branding its funds as Princeton Portfolio Research & Management “because it wants brokers outside the Merrill network to feel more comfortable selling the funds.â€?

A name change can attract new investors to a fund. According to the article:

A 2003 academic study that looked at funds in the “growth,” “value,” “small” and “large” categories found that funds that had changed their names over the years reviewed attracted 22% more money than other funds of a similar size and investment strategy that didn’t change their names. These flows are concentrated in funds that made a name change that is in line with a popular investment style, because investors tend to associate good performance with these names.

So is a fund name change good for the fund’s existing investors? It depends. There are obviously transaction costs associated with a name change. Depending on the advisory agreement, these costs may be covered by the fund itself or by the investment adviser out of the regular fees it charges the fund. Fund growth clearly benefits the fund adviser as its fee is based on a percentage of assets under management. It can benefit existing investors as well by spreading fixed costs among more investors. Whether this will happen, however, depends on the fee arrangement with the fund adviser. Some advisers charge a fee equal to a fixed percentage of assets (0.05% to 1.5%) under management regardless of how large a fund grows. This means the adviser captures all the economies of scale benefits, at least until the advisory agreement is up for renegotiation. Other advisers provide for decreasing fee percentages at specified fund-asset levels (these are referred to as breakpoints) in which case some scale benefits flow to the funds as assets grow and breakpoints are reached. Additionally existing fund investor can be negatively impacted if a fund grows so big that it becomes difficult for the adviser to execute its proven trading strategy (this is why funds close to new investors).

As an aside, about 50% of mutual funds are organized as corporations. Both Delaware corporate law and the MBCA require shareholder approval for a legal name change because it entails amending the corporation’s articles/certificate of incorporation. Most funds organized as corporations, however, are incorporated in Maryland. Maryland has won the competition for attracting mutual fund incorporations by including specific provisions in its corporate code specifically for funds. One such provision is § 2-605 which allows a corporate name change by board action alone.