Obfuscation in Mutual Funds

  • deHaan, Son, Xie and Zhu
  • Journal of Accounting and Economics, 2021
  • A version of this paper can be found here
  • Want to read our summaries of academic finance papers? Check out our Academic Research Insight category

What are the Research Questions?

According to the Investment Company Institute, mutual funds traded on US Exchanges comprise 58% of investors’ retirement savings. However, despite their popularity, there is ample evidence that they underperform their market benchmarks(1), and are usually tax-inefficient compared to ETF’s. The underperformance, at least in part, is due to overly complex disclosures and fee structures that make it difficult to understand and compare funds. Carlin (2009) suggests that complexity persists because it is part of a strategy to obfuscate unfavorable information and extract rents from retail investors. The authors of this paper ask the following questions:

  1. Do mutual funds create unnecessarily complex disclosures and fee structures to obfuscate weak net performance?

What are the Academic Insights?

The authors study the narrative complexity of 38 S&P 500 index mutual funds prospectuses from 1994 to 2017 by developing four measures of readability ( number of funds included in the prospectus, the repetition between the summary section and the rest of the prospectus, the length of the document as number of words, and finally the writing clarity) as well as the structural complexity(2). The authors find:

  1. Yes, there is strong and positive associations between fees and multiple measures of both narrative complexity and structural complexity. The authors find evidence that high fee funds have more complex disclosures and fee-structures than low fee funds.

The authors conduct a number of robustness checks to exclude that narrative complexity is a non-discretionary byproduct of an omitted variable or irrelevant to investors.

The authors comment that their findings do not necessarily mean that managers consciously create complexity to obfuscate high fees. However, even if managers do not understand the effects of complexity, the findings indicate that high-fee funds have not embraced the SEC’s efforts to reduce complexity in fund disclosures.

Why does it matter?

This paper is important because it contributes to the literature investigating why retail investors make poor mutual fund choices.

The Most Important Chart from the Paper:

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.


Mutual funds hold 32% of the U.S. equity market and comprise 58% of retirement savings, yet retail investors consistently make poor choices when selecting funds. Theory suggests that poor choices are partially due to mutual fund managers creating unnecessarily complex disclosures and fee structures to keep investors uninformed and obfuscate poor performance. An empirical challenge in investigating this “strategic obfuscation” theory is isolating manipulated complexity from complexity arising from inherent differences across funds. We examine obfuscation among S&P 500 index funds, which have largely the same regulations, risks, and gross returns but can charge widely different fees. Using bespoke measures of complexity designed for mutual funds, we find evidence consistent with funds attempting to obfuscate high fees. Our study improves our understanding of why investors make poor mutual fund choices, and of how price dispersion persists among homogeneous index funds. We also discuss insights for mutual fund regulation and the academic literature on corporate disclosures.

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Elisabetta Basilico, PhD, CFA
Dr. Elisabetta Basilico is a seasoned investment professional with an expertise in "turning academic insights into investment strategies." Research is her life's work and by combing her scientific grounding in quantitative investment management with a pragmatic approach to business challenges, she’s helped several institutional investors achieve stable returns from their global wealth portfolios. Her expertise spans from asset allocation to active quantitative investment strategies. Holder of the Charter Financial Analyst since 2007 and a PhD from the University of St. Gallen in Switzerland, she has experience in teaching and research at various international universities and co-author of articles published in peer-reviewed journals. She and co-author Tommi Johnsen published a book on research-backed investment ideas, titled Smarte(er) Investing. How Academic Insights Propel the Savvy Investor. You can find additional information at Academic Insights on Investing.

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