Investors are getting closer to matching the full returns of the mutual funds they buy, new data released on Tuesday showed, but analysts said it's an open question whether the cause is less performance-chasing or a booming market.
The average fund investor captured an annual return of 5.21% per year for the 10 years that ended in 2014. That's almost as much as the funds themselves, which captured a 5.75% return over that same time frame, according to a report by Morningstar Inc.
That gap of 54 basis points per year is far lower than the 250-basis-point difference that separated investors and mutual funds from 2003 to 2013. (One hundred basis points equal 1%.) During that decade, investors took home just 4.8% each year, while an investor who held the funds through the entire period would have pocketed 7.3%.
While normal performance figures represent how an investor would have done if they had remained invested for the whole period, Morningstar's “investor return” statistic attempts to capture the average actual performance of investors using
data about fund performance and estimates of investor purchases and redemptions.
Those returns tend to be less — sometimes far less — than the funds' managers, a phenomenon researchers attribute to investors and financial advisers chasing strong past performance and buying high or selling at the wrong time.
But
the numbers for 2014 suggest a significant improvement in outcomes for investors saving for retirement and other goals. Across stocks and bonds, investors largely took home more of the upside performance produced by their funds. That may have less to do with better behavior by advises and investors than the positive benefits of a long bull market to reassure investors. The S&P 500 generated positive returns in each of the last six years.
“Virtually everything except commodities has risen dramatically the past three and five years. This meant that investors could hardly go wrong,” Russel Kinnel, Morningstar's director of manager research, said in the report. “Investors were less likely to sell a fund because of poor performance, and, if they did, they likely jumped into a new fund that generally performed well.”
One of the most dramatic positive results is in target-date funds, largely held in employer-sponsored retirement accounts, such as 401(k)s, where investors actually captured slightly more returns than the fund category's average.
“Most target-date investors simply select the target-date fund that most closely approximates their retirement date, set their monthly contribution, and then rest easy,” Mr. Kinnel wrote. “When you see funds with the worst return gaps, they are usually highly volatile ones that inspire attempts at market-timing.”
Funds where investors fared poorly included municipal-bond funds and equity funds specializing in India, the Asia-Pacific, Europe and Japan, Morningstar said.
Among the Chicago-based researcher's other findings were that cheap funds — investment products with low expense ratios — not only produced better results, but investors also bought and sold them more effectively.
Outside of retirement plans, advisers play a crucial role in deciding when investors buy and sell funds. Four-fifths of U.S. households that own mutual funds outside of those retirement accounts
bought the funds with the help of a financial adviser, according to the Investment Company Institute, a trade group for asset managers.
Cerulli Associates, a market-research firm, estimates that approximately $4 out of every $10 invested in retail mutual funds are managed by an adviser.
And since the financial crisis, individual advisers have taken more control over fund selection. More have moved assets into small independent firms such as registered investment advisory shops that set their own rules. And, within big broker-dealers, managed-account offerings that allow an adviser to retain some or total discretion over portfolio management grew by 14.9% in 2014 to $2.4 trillion, according to Cerulli. That growth includes the popular fee-based “representative as portfolio manager” (rep-as-PM) format, which includes advisers who seek to add value by selecting funds, individual securities and other investments at the right time.
But the real test may come when the markets take a turn for a worse.
“We really haven't seen volatility and money sloshing back and forth from one asset class to another,” said Tom Brakke, a consultant specializing in investment due diligence, based in Excelsior, Minn. “This is a common challenge for us, to try not just to be drawn by that trend or by that performance and to try to erase that part of it from our thinking and just invest on the merits.
"It's exceedingly difficult whether you're a professional investor or not,” he said.
