New research finds that simplified mutual fund disclosure does not necessarily lead to investors making better portfolio decisions, just faster ones.

A new paper from the National Bureau for Economic Research, authored by a trio of academics from Harvard University and one from Yale University, indicates that the U.S. Securities and Exchange Commission’s new summary prospectus, which simplifies mutual fund disclosure, leads to faster investor decisions, but not smarter portfolio choices.

The conclusion is based on an experiment involving 186 Harvard employees (non-faculty, white-collar staff). They chose an equity portfolio and a bond portfolio, and received either traditional statutory prospectuses or new summary prospectuses. “We find no evidence that the summary prospectus affects portfolio choices,” they conclude.

They also find that the new summary prospectuses don’t do anything to improve investor understanding of the impact of sales charges. “We find that subjects’ portfolio choices do not respond sensibly to loads and redemption fees, whether or not they receive the summary prospectus,” it says. “Loads and redemption fees should be avoided to a greater degree as the investment horizon shrinks. Nonetheless, subjects with a one-month investment horizon chose portfolios with loads plus redemption fees that are on average 200 basis points higher than the load-minimizing portfolio. This implies that subjects are either confused about loads, overlook them, or believe that their chosen portfolio has an annualized log return (before loads) that is an implausible 24 percentage points higher than the load-minimizing portfolio’s.”

The one benefit of the new, shorter disclosure form, they found, was speed. “The principal welfare gain from the summary prospectus comes from allowing investors to spend less time and effort to arrive at the same portfolio decision they would have come to after reading only the statutory prospectus,” the paper says, adding that it also saves paper, printing, and shipping costs.

“On the positive side, the summary prospectus reduces the amount of time spent on the investment decision without adversely affecting portfolio quality. On the negative side, the summary prospectus does not change, let alone improve, portfolio choices. Hence, simpler disclosure does not appear to be a useful channel for making mutual fund investors more sophisticated and for creating competitive pricing pressure on mutual fund companies,” the paper concludes.

IE