Moving the Goalposts? Mutual Fund Benchmark Changes and Relative Performance Manipulation

We analyze changes to mutual funds’ self-declared benchmarks using hand-collected data from funds’ prospectuses. Under existing rules, funds can freely change their benchmark indexes and, implicitly, the historical returns to which they compare their past performance. Funds exploit this loophole by adding (dropping) indexes with lower (higher) past returns, thereby materially improving the appearance of their benchmark-adjusted returns. High-fee funds, broker-sold funds, and funds experiencing poor performance and outflows are more likely to engage in this behavior. These funds subsequently attract additional flows despite continuing to underperform their peers.