I’m writing this blog post shortly after a tragic accident in Branson, Missouri involving a “duck boat.” Seventeen passengers (of the 29 onboard) drowned.

Let’s take a trip forward in time to July 2019.  You’re interested in using the same company and going on a duck boat tour during a trip to Branson.  You write and ask about their safety record.  They tell you it’s “100%.”

You know this can’t be right because you’re aware of the accident.  You make further inquiry.  Here’s what they tell you:  “We only report on the tours that made it back to shore without the loss of life.”

How likely is it that you would use them?

Tricked by misleading data

While you wouldn’t use a tour company that misleads you in this manner, many investors purchase actively managed funds, even though these funds often engage in a similar practice.

As Robin Powell notes in this blog, the performance data of active mutual funds is often massaged to eliminate “all those funds that performed so badly they were quietly closed or merged with other funds."

According to renowned financial author, Charles Ellis, this practice gives you an “enhanced” impression of the purported skill of active fund managers.  Ellis characterizes the ensuing data as humongously biased.

He’s right.

Legal ramifications

Here’s something I’ve never understood.  Legally, an “omission of a material fact” occurs when …a broker or other financial advisor does not fairly and fully disclose all of the known risks associated with a particular investment and losses are incurred as a result.

If a mutual fund excludes closed or merged funds from its performance data, surely that an omission of a material fact.

Yet, I’m not aware of a successful claim for fraud against a broker, advisor, or fund family that engages in this practice.

Since legal redress is unlikely to be successful, knowledge of how data is presented to you may be your best defense when evaluating the track record of active fund managers.

Resource of the week

This blog post by Robin Powell should be read by every investor.