Oakmark Funds Provide Lesson in Survivorship Bias

A few weeks ago I compared the Oakmark family of funds to comparable passive benchmarks. The four Oakmark funds with 10 years of history outperformed their comparable DFA and Vanguard funds by about 0.4 percent per year. The asset classes we compared were U.S. large, international large-cap value and international small-cap value.

Later, a reader let us know that Oakmark closed its small-cap value fund in 2004. The fund had more than $350 million in assets, but it was closed due to poor performance. At that time, it was among the worst performing small-cap value funds, with a three-year annualized return of 1.9 percent that lagged its peers by more than 10 percentage points. This wasn't included in our comparison.

Kevin Grogan, my Right Financial Plan co-author, noted that this is an important lesson in survivorship bias. Survivorship bias is the tendency for poor performing funds to be closed by the fund company. Once these funds are closed -- by merging them with other funds or liquidating them outright -- their performance disappears. When looking at past returns of funds or fund families, this phenomenon can result in an overestimation of past returns.

By closing or merging funds, a mutual fund company can hide poor performance. Unfortunately, investors in the closed funds actually experience the poor returns, and the poor performance isn't hidden from their portfolio.

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