Follow-up to landmark investment fund study points to the power of steady contributions
Those looking to wring the biggest returns from their mutual funds and ETFs should keep three L’s in mind: long-haul investing, low volatility, and low fees.
That’s one of the main takeaways from the latest Mind the Gap global investor returns study released by Morningstar, which followed up on its first iteration released in 2017. Drawing on data from seven major markets around the world, the authors looked at how investors fared compared to the funds they allocated assets to for each year-end from 2014 up to 2018; they evaluated U.S. funds based on 10-year return periods, while 5-year returns were used for funds in other markets.
As in the first report, the analysts compared asset-weighted internal rate of return data with category averages over multiple periods to determine how much was lost to poor timing. However, on top of using share-class level data, the more recent analysis was refined to include funds that did not survive a particular measured time period.
In an attempt to better capture ups and downs in fund flows, Morningstar analysts also used a portfolio method to weight returns against flows on a monthly basis. Exchange-traded funds were included for the first time, with ETF flows being inferred based on comparisons of monthly net assets.
According to the latest report, the gap between investor returns and fund returns declined compared to 2017. Overall, funds in the U.S. had a gap of 45 basis points, while those from Europe had a gap of 53 basis points. Meanwhile, Australia and South Korea showed positive gaps of 65 basis points and 26 basis points, respectively.
“In general, the gap widens around dramatic market reversals such as those seen in 2008 and
2009,” the report said, noting some investors’ tendency to sell near the bottom and miss out on a subsequent rebound. Given the relatively stable and upward-trending markets of recent years, investors have been less likely to make such bad timing decisions.
In Australia, South Korea, and the U.S., those with assets in investment vehicles that required a commitment to steady returns did well. In the U.S., investors in asset-allocation funds saw the biggest benefit (rolling-10 year investor returns exceeded total annualized returns by 0.22%), which Morningstar’s analysts attributed to the funds’ low volatility as well as the investors’ steadfast contributions through the highs and lows of the market.
“[A]llocation funds, which tend to damp swings in returns, were used well by investors likely because they were less volatile and sometimes favored in retirement vehicles,” the report said.
Reflecting the impact of fees on returns, lower-cost funds tended to show higher total returns and higher investor returns. The pattern held across all categories of funds in the U.S., Australia, and Europe. South Korea, however, was an exception as the lowest-fee funds did not produce the highest investor returns in the alternative and equity categories.
