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Carling Spelhaugcarling.spelhaug@morningstar.com
Ill-Timed Investments Continue to Cost Fund Investors, According to Morningstar Research

CHICAGO, June 14, 2016—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today published its annual study of investor returns, which measure how the average investor fared in a fund. Morningstar Investor Return is a dollar-weighted return that incorporates the effect of cash inflows and outflows from purchases and sales as well as the increase in a fund’s assets. In this study, Morningstar compared investor returns to a fund’s total returns and found investors cost themselves between 0.74 percent and 1.32 percent per year by mistiming their purchases and sales of equity and bond funds during the 10-year period through Dec. 31, 2015.

“Investors tend to buy high and sell low, missing out on a fund’s gains in value. Our investor returns data has shown that investing decisions made a decade ago have an impact that compounds powerfully over time,” Russel Kinnel, chair of Morningstar’s North America ratings committee and editor of Morningstar® FundInvestorSM, said. “Though investor return figures have somewhat improved year over year, the latest data shows that investors still face challenges in using mutual funds correctly.”

In the study, Morningstar evaluated U.S. open-end mutual funds and calculated average asset-weighted investor returns and average total fund returns. Morningstar also tested four factors and their effect on investor returns: Morningstar® Stewardship GradeSM, standard deviation, tracking error, and expense ratio.

Key highlights of the annual study include:

  • Morningstar Investor Returns lagged total fund returns by 1.13 percent on an average annualized basis for the 10-year periods that ended between 2012 to 2015.
  • Investors in allocation funds experienced the smallest gap between total returns and investor returns—17 basis points—for the 10-year period through December 2015. Municipal bond fund investors lagged total returns the most, with a 132-basis-point gap.
  • Investors fare better with shareholder-friendly firms. Funds with a Stewardship Grade of “A” saw investor returns beat total returns by 0.18 percent. Investor returns for funds with an “F” Stewardship Grade lagged total returns by 2.59 percent.
  • When grouped by asset class, funds with higher volatility negatively affect investor returns. The most-volatile quintile of funds saw investor returns lag by 1.29 percent. Investor returns in the least-volatile quintile of funds beat total returns by 0.81 percent.
  • Investor returns lagged total returns of funds with high tracking error, which measures the extent to which a fund’s returns vary from the benchmark, by 0.49 percent. Meanwhile, investor returns beat the total returns of funds with the lowest tracking error by 0.82 percent.
  • Low-cost funds exhibit smaller gaps between total returns and investor returns than high-cost funds. Investor returns for the least-expensive quintile of all funds were 6.5 percent annualized in a five-year period compared with 6.39 percent for the average fund, as investors timed their investments well. However, the average investor in the priciest quintile of funds had returns of 3.43 percent annualized compared with returns of 4.8 percent for the average fund, showing that the average investor in the least-expensive quintile nearly doubled returns of the average investor in the priciest quintile.

The whitepaper is available here and in Morningstar DirectSM Cloud, the company’s web-based investment analysis platform for professional investors. A shorter version of the study is available in the May 2016 issue of Morningstar FundInvestor and in an article and video on Morningstar.com®.

Morningstar has approximately 115 manager research analysts worldwide who cover approximately 4,000 funds. The company provides data on approximately 202,000 open-end mutual funds, as of March 31, 2016.

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, and retirement plan providers and sponsors. Morningstar provides data on approximately 525,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on nearly 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement and management as of March 31, 2016. The company has operations in 27 countries.

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©2016 Morningstar, Inc. All rights reserved.

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