While mutual fund investors have problems over the timing of when they buy and sell funds, they aren’t really that “dumb” in the traditional sense, says John Rekenthaler, vice president of research for Morningstar.
Rekenthaler, who spoke on Thursday during the Morningstar Ibbotson Conference 2013 in Hollywood, Fla., told an audience of about 70 guests that the myth of “dumb investors” deserves “close scrutiny.”
He and his colleagues looked at why investors were “not making money that one might expect from funds,” a conundrum they defined as the “return gap.”
Most analysis looks at total returns, which are time weighted, and compares them to investor returns, which are dollar weighted. But the Morningstar experts decided to calculate a money-weighted measure of returns to help them assess a fund’s internal rate of return and then compare these numbers with time-weighted returns. The result? A return gap, which could help the analysts better assess investor behavior.
From 2002-2012, the initial research revealed that this gap was 1.01% for domestic-stock funds, 3.11% for international-stock funds, 1.35% for municipal bonds, 0.87% for taxable-bond funds, and 0.84% for allocation funds.
“This doesn’t mean that fund investors are ‘dumb,’ though it is true that the timing of purchases matter,” Rekenthaler said.
The Morningstar team then dug deeper to look at whether or not investors were buying the “wrong funds,” funds with high charges, poor fund managers or the wrong assets. “These are the four ways to get this wrong,” he explained.