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Christopher Krantzchristopher.krantz@morningstar.com
Morningstar’s First Study of UK Investor Returns Finds Poor Timing Costing Some Investors Dearly
LONDON, 3 July 2017—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today published its first study of UK investor returns, “Mind the Gap 2017 – UK,” which measures how the average investor fared in a fund and the impact investor behavior can have on investment outcomes. The study uses the Morningstar Investor ReturnsTM methodology to derive a money-weighted return of a fund that incorporates the effect of cash inflows and outflows from purchases and sales, as well as the increase in a fund’s assets. The “gap” refers to the shortfall between funds’ money-weighted and time-weighted returns, reflecting how opportunely investors have timed their investments.

During the five-year period through Dec. 31, 2016, the study found that investor returns for various asset classes in the UK varied from stated returns, on average, by a range of -0.51 percentage points to 0.46 percentage points per year. Overall there is a slightly negative gap between investor returns and total returns, which could be due to bad timing on the part of investors in terms of asset allocation or fund selection. The study draws on Morningstar data for open-end mutual funds domiciled in the UK and calculates average asset-weighted investor returns and average total fund returns.

“This first study of UK-domiciled funds echoes the results of our longer running Mind the Gap study in the U.S. market, in that overall we see a negative return gap between investor returns and total returns,” said Simon Dorricott, associate director of equity strategies at Morningstar. “One possible explanation is that investors tend to invest in funds, markets or categories that have already shown strong absolute returns, and are subsequently invested through a period of lower absolute performance.

“To lessen the potential for reduced returns due to such behaviour, investors have two simple strategies open to them. The first is to make regular contributions across their investments rather than infrequent lump sum contributions. The second involves setting an appropriate balanced asset allocation and using flows to re-balance, thus reducing the likelihood of buying into asset classes at recent highs,” said Dorricott.

Key highlights of the study include:
  • The largest gap observed in the UK study is -0.51 percentage points for the Diversified Equity group. Although this represents only a small percentage of the annualised return produced by funds in the group, it is still a meaningful loss of return.
  • The average investor gap for all UK funds is -0.08 percentage points.
  • Unlike in the United States, investors in the UK have not seen better returns from asset allocation funds, which showed a gap of -0.39 percentage points.
The full research report is available here.

The UK research report follows Morningstar’s first global study of investor returns, “Mind the Gap 2017,” published in May 2017. The global research report is available here and an article on Morningstar.com® is available here.

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About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, retirement plan providers and sponsors, and institutional investors in the private capital markets. Morningstar provides data and research insights on a wide range of investment offerings, including managed investment products, publicly listed companies, private capital markets, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $200 billion in assets under advisement and management as of March 31, 2017. The company has operations in 27 countries.

Morningstar’s Manager Research Group consists of various wholly owned subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC. Morningstar’s Manager Research Group produces various ratings including the Morningstar Analyst Rating for funds and the Morningstar Quantitative Rating for funds. The Analyst Rating is derived from a qualitative assessment process performed by a manager research analyst, whereas the Morningstar Quantitative Rating uses a machine-learning model based on the decision-making processes of Morningstar’s analysts, their past ratings decisions, and the data used to support those decisions. In both cases, the ratings are forward-looking assessments and include assumptions of future events, which may or may not occur or may differ significantly from what was assumed. The Analyst Ratings and Quantitative Ratings are statements of opinions, subject to change, are not to be considered as guarantees, and should not be used as the sole basis for investment decisions. This press release is for informational purposes only; references to securities should not be considered an offer or solicitation to buy or sell the securities.

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