The investor-returns gap, a measure of the gap between average investor and average official fund returns, is shrinking and returns are rising, according to Morningstar’s second global “Mind the Gap” study, released Thursday.
The study estimates the performance of the average dollar invested in a fund, and compares this to the fund’s time-weighted return. The difference, or gap, represents the effect that the timing of investors’ purchases and sales had on the investment outcomes they achieved.
The analysis showed that the return on the average dollar invested in funds lagged the average fund’s return in most of the seven markets studied: the U.S., Australia, Europe, Singapore, South Korea, Taiwan and the U.K.
“Though it’s an estimate, the investor return gap data can indicate when and where investors aren’t getting the most out of their funds,” Russel Kinnel, chair of Morningstar’s North America ratings committee, said in a statement.
According to the study, investor return gaps declined across most of the seven markets since the first global study in 2017. Investors tended to obtain the best results in markets where systematic investing was common, and the worst results in volatile markets.
“Investor return gaps generally narrowed, as placid markets appear to have kept investors from over-trading on emotion,” Kinnel said. “In most major markets, we found smaller gaps for low-cost funds and low-volatility funds.”
He added that investors who automatically contributed to their investments were most successful. “Investors should continue to prioritize low-cost and less-volatile funds, and steady investments that can stand the test of time.”
The study reviewed five rolling 10-year return periods in the U.S. and five rolling five-year return periods outside the U.S.
Low-cost and low-volatility funds fared better across asset classes, with exceptions. The volatility gap grew in the U.S., Australia and Europe, but not in some Asian markets.
In the same three markets, low-cost funds produced higher investor returns and higher total returns across asset classes.