A recent article in Morningstar highlights the firm’s research into historical trends in fund investor returns which show, “times have been good lately, and we can see that in a look at aggregate investor-return data through the first quarter of 2018.”
The study analyzed open-end mutual fund investor returns over the trailing three-, five- and 10-year periods by asset class and by Morningstar category. By asset-weighting investor returns, the study was able to highlight the results of the peer group’s largest funds and more accurately represent the typical investor’s experience. The team compared peer group results with “those of the average fund to see whether investors times their investments well.” The study measured “gap”, meaning the degree to which a typical investor captured (or didn’t) the fund’s total return.
An overview of findings is as follows:
- Balanced funds (including allocation, target-date and traditional balanced) saw a positive gap of .30% with the average investor earning a return of 5.93%–which the article notes is an improvement over Morningstar’s last study.
- Municipal bond funds saw the gap shrink to a 1.26% shortfall (based on asset-weighted investor returns of 2.23%). While the decrease is encouraging, the article notes, “it still seems like a pretty high figure for a fairly tame low-return asset class.” The gap worsened in international equity, taxable bond and alternative funds.
- “In the aggregate,” the article concludes, “the average investor trailed the average fund by 26 basis points annualized over the past 10 years. The asset-weighted investor return for the period was 5.53% annualized versus 5.79% for the average fund.”
Regarding takeaways for investors, the article highlights themes it has seen emerge over the years with respect to strong investor returns. “Low costs and relatively low-risk funds tend to work much better for investors,” the article notes, adding that “knowing a fund’s strategy and when to expect it to fare well or poorly will help you know when to sell and when to hold on. The better you know your funds, the better you’ll do.”
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