Study of US investors suggests the gap between investor returns and reported total returns is closing in
As the mutual fund and ETF industry matures, investors are getting better at judging when to make their moves according to a new report.
The Morningstar “Mind the Gap” report measures how investors' actual results stack up compared with reported total returns by estimating the performance of the average dollar invested in mutual funds and exchange-traded funds and compares it to the fund's time-weighted return.
The gap between the two indicates how the timing of investors’ purchases and sales impacted their investment outcomes.
US equity funds and allocation funds fared the best in the most recent analysis.
"While investor returns reflect a variety of factors and include some outside investors' control, the fact that the 'gap' has steadily declined for the past two 10-year periods is notable and suggests the investor experience has improved over time," said Amy C. Arnott, portfolio strategist, Morningstar. "We found that dollar-weighted returns significantly improved once the bear market of 2008 was dropped from the trailing 10-year period in 2018 and continued improving for the period ending in 2019. We're seeing a maturation of the fund industry as it grows in size and net cash inflows and outflows start carrying less weight."
Winners and losers
Funds with lower volatility fared better across category groups, with a few exceptions, notably alternative funds and municipal-bond funds, along with specialty equity funds.
All three showed negative return gaps in part because of shifting cash flows that were also poorly timed, underscoring the fact that they can be more difficult for investors to use effectively.
