Obfuscation in Mutual Funds
56 Pages Posted: 13 Mar 2020 Last revised: 12 Jul 2021
Date Written: July 8, 2021
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 poor choices are partially due to 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 charge widely different fees. Using bespoke measures of complexity designed for mutual funds, we find evidence consistent with funds attempting to obfuscate high fees. This study improves our understanding of why investors make poor mutual fund choices and how price dispersion persists among homogeneous index funds. We also discuss insights for mutual fund regulation and academic literature on corporate disclosures.
An Online Appendix with supplementary materials is available at the following URL:
Keywords: mutual funds; disclosure obfuscation; strategic disclosure; price dispersion; retail investors
JEL Classification: G11, G23, M41, D83, D14
Suggested Citation: Suggested Citation