April 4, 1997


 Dead-and-Buried Funds Would

 Alter 'Averages' -- If Included





 The average stock fund has trailed the Standard &

 Poor's 500-stock index benchmark in recent years,

 prompting plenty of grousing. But did funds

 actually do even worse than the usual measures of

 "average" performance?


                           Some fund researchers

                           and finance professors

 believe the answer is yes. To bolster their case,

 they've been prowling around the mutual-fund

 graveyard, gathering the names and vital

 statistics of the many mutual funds that have

 been merged into others or liquidated out of



 Lousy performance is a prime reason that funds

 are killed off, they explain. So the usual

 industry averages, figured without deceased

 funds, may be somewhat exaggerated and "not

 representative of what investors actually got,"

 says Don Phillips, president of Morningstar Inc.,

 the Chicago fund-data company.


 However, the graveyard hasn't yielded all its

 secrets -- or conclusive findings. Some industry

 data and academic research show that "average"

 fund results for particular periods have been

 boosted significantly by the absence of dead

 funds. But other numbers suggest that there was

 no significant upward distortion of "average"

 fund results over the past decade.


 If such distortion exists, it would be yet

 another reason for investors to favor unmanaged

 index funds that simply track the S&P 500 or

 another benchmark, say index-fund advocates such

 as Vanguard Group Chairman John C. Bogle.


 While the results aren't necessarily clear, it is

 obvious that lots of funds disappear each year.

 In 1996, for example, 242, or 5%, of the 4,555

 stock funds tracked by Lipper Analytical Services

 Inc., of Summit, N.J., were merged or liquidated.


 As a result of such yearly disappearances, some

 of Lipper's fund-performance averages, like wine

 and cheese, have improved markedly with age.

 Consider 1986: A decade ago, Lipper reported that

 568 diversified U.S. stock funds had delivered an

 average 1986 return of 13.39%. Today, Lipper,

 which supplied the data for this section, puts

 the average 1986 return at 14.65%. Why the

 improvement? The new number is based on the

 performance of only the 434 funds from the 1986

 group that are still in business today.


 If you look at results for dead funds as well as

 survivors, says Princeton University economics

 professor Burton Malkiel, "you show that

 mutual-fund returns are a lot lower than most of

 the published statistics."


 Mr. Malkiel did just such a study, using Lipper

 data, for the decade from 1982 through 1991. His

 conclusion, published in the Journal of Finance:

 While funds around for the whole period gained an

 average 17.09% a year, the average return from

 all funds in existence each year was a lower

 15.69%. The adjustment makes the average fund

 look even worse compared with the S&P 500's

 average annual gain of 17.52%.


 "The main lesson is that active management has

 not done super-well," says Mr. Malkiel, the

 author of "A Random Walk Down Wall Street."

 (That's not a surprising conclusion from Mr.

 Malkiel, a self-described "believer in index

 funds" and also a board member at Vanguard, a big

 index-fund seller.)


 But the argument that average fund returns are

 inflated by survivorship bias isn't airtight,

 particularly for more recent periods. Using an

 admittedly crude calculation based on Lipper

 numbers, Mr. Bogle of Vanguard estimates that

 survivorship bias added only three-tenths of a

 percentage point to the average annual stock fund

 return over the past decade. That's not much when

 the average annual return was over 13%. However,

 in looking at the 15 years through 1992, Mr.

 Bogle found an upward bias of just under one

 percentage point a year.


 Underscoring the issue's ambiguity, officials at

 Morningstar got a surprise this week when they

 looked at preliminary results of a campaign to

 eliminate survivorship bias from their database.

 Over the past decade, it appears that adding dead

 funds back in with survivors wouldn't change the

 average U.S stock fund performance at all.


 That jibes with data from Micropal Inc., a

 fund-research firm based in Britain that keeps

 some performance records on U.S. funds both with

 and without an adjustment for survivorship bias.

 Performance differences are slight over the past

 decade, says David Masters, a senior funds

 analyst, and some stock-fund categories actually

 performed better when nonsurviving funds are



 In any event, the survivorship-bias debate

 highlights the approximate nature of some numbers

 that investors may assume to be precise. Fund ads

 always warn that past performance is no guarantee

 of future results. When it comes to the "average"

 stock fund or "average" small-stock fund, it

 seems, past performance doesn't even guarantee an

 exact indication of what happened in the past.


 Distortions in fund-performance averages could

 become more pronounced in future years. The stock

 market could see some tough times, Mr. Bogle of

 Vanguard says, and an extended downturn might

 lead to lots more funds being merged or

 liquidated. He figures that survivorship bias was

 far greater in the decade through 1981, a period

 that included the painful 1973-1974 bear market.


 Meanwhile, data gatherers at Lipper and

 Morningstar fret about a different threat to the

 accuracy of their fund-performance averages --

 what Morningstar's Mr. Phillips calls "creation

 bias." Regulators are allowing some new funds to

 count, as part of their track record, performance

 achieved when the funds existed as limited

 partnerships or other nonfund vehicles. Fund

 companies will only want to cite such records if

 they are good, the data gatherers say. So

 including that "preinception" performance in fund

 averages will tend to pump up results.


 Mr. Phillips says Morningstar will probably add

 such performance to its database but highlight it

 in some way as hypothetical. Lipper won't put

 those early results in its standard database. "To

 me, this is a much bigger issue than any sort of

 survivor bias," President A. Michael Lipper says.

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