Friday Facts: Beware Fund Names Can Create False Expectations

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As a professional market observer, you know that the marketing departments are sometimes very creative when it comes to the name of a fund. This is especially true in the segment of sustainable investment themes.

But can retail investors distinguish between a marketing-driven fund name and the reality of an investment portfolio? I don’t think so. The fact that misleading fund names might be used to attract retail investors' money should be a concern for market watchdogs since these investors are often not able to understand the language used in the respective sales documents and/or can’t evaluate if the portfolio holdings do really fulfill the expectations raised by the fund name or if these holdings are only best in class. The latter would mean that the portfolio holdings do less harm than their peers with regard to the investment objective of the fund, but they still do harm, which means they may still be a part of the problem and not the solution.

With regard to the above, the marketing departments of asset management companies should be held responsible if the fund does not deliver on the expectations of the investors. Not every theme that sounds good or looks good on paper can be used as an investment objective since the proposed implicit investment goal can’t be reached by investing in stocks or bonds. So, investors need to think twice if the investment goal can be reached by investing in companies that are seeking growth and returns before buying, for example, a sustainability-themed fund/ETF whose fund name suggests that the fund helps to fix intangible problems.

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The views expressed are the views of the author and not necessarily those of LSEG.

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