Where Did All the Mutual Funds Go?

Here’s an interesting and uncomfortable fact about the mutual fund industry; every year a substantial number of mutual funds fail entirely. While the fact is that there are many ways in which mutual funds can fail, including underperforming, many are failing in a much more permanent sense these days as they either drop off the mutual fund map completely, are liquidated or are merged into other investing products.

Between 2001 and 2012 approximately 7% of all mutual funds “died”, up about 1% from the 1960s. If you assume that this same failure rate will persist over the coming decade, approximately 2500 of the 4600 equity funds in existence today will be gone at the end of the decade, a number that amounts to approximately 1 fund every two business days.

The interesting, and unnerving, part is that while these statistics seem to suggest that available mutual funds are declining dramatically, the opposite actually is true. There are actually more mutual funds being “born” these days then there are “dying”.

For example, there were 7238 mutual funds available at the end of 2012, including equity funds and other open and mutual funds (but not including money market funds). That number was 6876 at the end of 2000 meaning that, even though they were “dying” at a rate of 7% per year, the actual net amount of mutual funds has increased in the last 12 years.  (These statistics and others that we are using come from a Morningstar analysis put together for US News.)

If you want to get a better idea of how the mutual fund industry has grown it helps to go back to the end of 1990 when only 2395 mutual funds existed. The number of funds has tripled since then and 786 new funds were actually created in 2000 alone. That’s a substantial amount of new funds even though the number has fallen off slightly as of late but,  more notably, 500 new funds have been “born” in the 2 most recent calendar years alone.

Of course  it’s really not a big surprise that so many funds are dropping off the map as so many new ones come into existence. Many are highly specialized funds that come with arcane risks and others are simply created to chase a fad or trend. At the height of the tech bubble in 2000 for example it was no surprise that so many funds were created.

All industries, including the mutual fund industry, are spurred by innovation but, as is true in all other industries, the benefits of proliferation are usually outweighed by the costs at some point. At the end of the day many of the funds that have recently been created never should have been started in the first place, especially when you consider that the rate of failure has increased from 1 to 7%.

The cost of a mutual fund failing  and fading away is not some abstract notion however and, when one liquidates or is merged away, the people who are affected the most are those investors who put their hard-earned money into the failed fund. Mutual funds don’t fail if they’re doing well, obviously, but when they do people lose money.

Since calculations of how well the mutual fund industry is doing have a tendency to focus on existing funds, investors can actually suffer even if they’ve never heard of a particular fund that has failed and gone on to the scrap pile of fund history. The term for this is “survivorship bias” and it gives investors a skewed impression about the types of returns they can expect (on average) for their mutual fund investments. These false impressions, not surprisingly, are exactly what to contribute to the willingness (or inability) of investors to see the actual risk involved with a particular fund.

In the end this “excess proliferation” isn’t really good for the market or investors. The increase in mutual funds, including prudent funds that are a good investment as well as complex and even absurd funds that probably aren’t, aren’t going to serve the overall interests of investors. From what we’ve seen in the last few years, the fact that so many mutual funds are “dying” is a trend that doesn’t bode well for the industry.

If you have questions about investing, mutual funds, the stock market or financial questions in general, please send us an email or leave a comment and we’ll get back to you with answers, advice and solutions ASAP.

4 thoughts on “Where Did All the Mutual Funds Go?

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