Research suggests that transparency in fund information can drive underperformance
Investors in mutual funds would certainly appreciate getting information about their performance. But whether they benefit from the information is another question altogether.
In a piece written for The Wall Street Journal, Derek Horstmeyer, assistant professor of finance at George Mason University’s Business School, said that investors in funds that disclose data most frequently tend to see their returns lag the funds’ by the widest margins. On the other hand, shareholders of funds with less frequent disclosures suffer less of a performance gap.
That there’s a so-called return gap, which compares a fund’s return with the return for an average investor in the fund, is to be expected. As Horstmeyer explained, investors tend to move out of their positions at the bottom of the market during periods of panic, rather than buying securities at their cheapest. In times of exuberance, on the other hand, the investors tend to pour more money into the market instead of paring back to maintain their asset allocations.
“For investors who hold U.S.-stock mutual funds that disclose their data monthly, the median return gap over the past five years was 0.95 percentage point a year,” he said, citing data from Morningstar. Meanwhile, investors in U.S.-stock mutual funds that disclose on a quarterly basis were said to have experienced a median return gap of 0.60 percentage point a year over the past five years.
The disparity in returns was also evident in other types of mutual funds. Investors in international equity funds that disclose monthly suffered a median gap of 0.548 percentage point a year, compared to just 0.36 for those in funds with quarterly disclosures. The difference is less pronounced in US small-cap equity funds, where monthly disclosures and quarterly disclosures were correlated with median return gaps of 0.99 and 0.954, respectively.
Even in index funds, which are often seen as buy-and-hold investment vehicles, there are indications of mistimed trading decisions influenced by reporting. The median return gap for investors in US Index Funds that reported on a monthly basis was said to be 0.501 percentage point, while those in funds that reported quarterly had a median gap of 0.207.
“Measuring the volatility of investment flows into and out of mutual funds confirms that investors in funds that disclose more frequently tend to trade more,” Horstmeyer said.
He noted that funds with monthly portfolio information disclosures tend to have higher rates of inflows and outflows than the median for all funds. That activity, he said, can not only lower investors’ returns but could also lead to higher taxes as investors realize capital gains when they sell shares.
