Morningstar has published its first global study of investor returns, which measures the average investor’s yield from a mutual fund and how investor behaviour can impact investment outcomes. Titled Mind the Gap 2017
, the study determined the dollar-weighted return of a particular fund while incorporating the effect of cash inflows and outflows from purchases and sales, as well as the increase in fund’s assets.
Average asset-weighted investor returns and average total fund returns were calculated using open-end mutual fund data from nine countries, including Australia, Canada, Hong Kong, the UK, and the US. Over a five-year period through Dec. 31, the study found that investor returns worldwide differed from stated returns, on average, by a range of -1.4% to 0.53% per year.
“Steady investment contributions to savings plans and automatic rebalancing proved to be key in generating positive investor returns in countries including Australia, South Korea, and the United States,” said Russel Kinnel, chair of Morningstar’s North America ratings committee.
Investor returns per year proved positive for US allocation funds (0.05%), Australia’s superannuation funds (0.53%), and South Korea’s fixed-income funds (0.47%). All these countries offer investment vehicles that come with automatic contribution and payment options, according to Morningstar, which prevent investors from getting off-track with unwise market timing decisions.
The average Canadian fund gained 8.42% over the five-year period, as compared to 7.33% for the average Canadian investor. The disparity translated to a 1.09-percentage-point gap, which was the third largest among seven major fund markets studied.
Morningstar also examined how investor returns were affected by four factors, which includes the expense ratio. A negative correlation was found between the cost of funds and the returns enjoyed by investors; often, the decline in investor return was greater than the associated increase in cost.
Lower cost-funds are becoming more accessible to investors because of automatic investment options offered by savings plans, according to Kinnel. “[W]hen sorted on fees, lower-cost funds produced better investor returns across the board, a trend surfacing in Luxembourg and the United States,” he said.
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