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Portfolio > Mutual Funds > Equity Funds

Gap Between Fund Performance and Investor Returns Has Narrowed: Morningstar

By Michael S. Fischer

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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.”

Study Highlights

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.

For the U.S., Morningstar examined 10-year results for each year-end from 2014 to 2018. It found that in general, the gap widened around dramatic market reversals, such as those in 2008 and 2009, because some investors panicked and sold near the bottom, missing out on the rebound.

Since 2017, the investor return gap has declined in the U.S. to 45 points. Among asset classes, U.S. allocation funds produced investor returns 22 basis points higher than total returns, while investors in alternative funds lagged total returns by 144 points.

The study looked at the three largest European fund markets outside the U.K. — France, Ireland and Luxembourg — and found an overall gap of 53 basis points in the average five-year period.

In terms of asset class, fixed income has been tricky for European investors because of market conditions in government bonds, emerging-markets debt and high yield, resulting in a gap of 40 basis points. In contrast, investors have earned a higher return than the total return on their euros in allocation funds of 32 points.

Morningstar found that investor return gaps in the U.K. market turned positive, to 27 basis points with allocation, equity and alternative funds all producing higher investor returns than total returns.

Investors in Australia’s superannuation funds, which require a commitment to steady investing, are coming out on top, the study found, with an overall outperformance of 65 basis points versus total returns and strong investor returns for all asset classes.

South Korean investors tend to invest money in regular installments when they choose a distribution platform and start investing in funds, and as in Australia, Korea’s defined-contribution plans require an automatic contribution.

Morningstar’s analysis showed that investor returns were higher than total returns within Korean allocation funds across all five rolling five-year periods.

In Taiwan, the study found that fixed income has been challenging for investors, with returns in negative territory in four of the five periods examined. In Singapore, investors in equity lagged total returns on average for the five five-year periods, but the gaps are getting smaller.

Michael S. Fischer

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