For the five-year period ending December 31, 2016, global investor returns varied from stated returns by between -1.40% and 0.53% per year, reveals an investor returns study by Morningstar. The study measures how the average investor fares in a fund and the impact investor behaviour has on investment outcomes.
“Although much has been written about active managers lagging their benchmark,” says the report, “there is less attention to investors lagging their funds’ performance.”
As explained in the report, investor returns are money-weighted as opposed to time-weighted — the latter being the standard way of displaying an investment’s total returns. To better show the returns captured by the typical fund, the report calculates investor returns for a fund by adjusting returns to reflect monthly flows and their compounding effect over time. “Generally, investor returns fall short of a fund’s stated time-weighted returns because, in the aggregate, investors tend to buy after a fund has gained value and sell after it has lost value,” says the report.
Overall, the study finds investors achieve better outcomes when using systematic investment programs and when investing in lower-cost funds.
- The investor return gap in the United States shrunk to 37 basis points annualized over 10 years, from 54 basis points for the 10 years ended 2016. But this is partly because yearly flows haven’t kept pace with the growth in assets under management, says the report. “Thus, in the aggregate, mutual fund investors are making fewer market-timing calls that can harm results.”
- Considering all fund categories, the average Canadian fund gained 8.42% over the five-year period, versus 7.33% for the average fund investor — a 1.09 percentage point gap. This disparity was the third largest among the seven major fund markets in the study.
- Investor returns per year proved positive for allocation funds in the United States at 0.05%, superannuation funds in Australia at 0.53% and fixed-income funds in South Korea at 0.47%. These countries all offer investment vehicles with automatic contribution or payment options that keep investors on track and prevent them from unwise market-timing moves.
- When sorted on fees, investor returns declined as funds rose in cost, often by more than the difference in costs, suggesting that behavior of investor and manager alike in high-cost funds was poor, while low-cost funds represented “a meeting of smarter investors and managers.”