Morningstar Magazine - August/September 2018 - 52
Strategies
ALL Funds*
5.53
5.79
-2
%
The gap in taxable-bond funds grew to 88 basis
points annualized with an asset-weighted investor
return of 3.01% annualized. It is not too surprising
that investor timing has been off in morespeculative categories like emerging-markets bond
and bank-loan funds, but even core intermediatebond funds show a gap of 87 basis points.
10-Year Investor Return Gaps
Alternatives show the worst investor returns but
the best investor returns gap. The investor
return is a dismal 9 basis points, but the gap is a
positive 140 basis points. Those two results are
related rather than contradictory: When a fund has
poor returns for an extended period of time, then
just about any time is a good time to sell. It is
worth noting, though, that bear-market funds are
in our alts group, and they drag down returns
while boosting the positive gap.
Municipal Bond
The alts funds' results also are affected by
survivorship bias. Our figures only include funds
that were in existence at the end of the
period. Given the asset weighting, that likely has
a very small effect in more-established asset
classes, but it likely has an outsize impact in alts,
which was quite small 10 years ago.
In the aggregate, 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.
This aggregate figure included only funds that
hold individual securities, and excluded
funds of funds. The separate asset-class returns
include funds of funds to capture investors'
experiences in areas where that structure
is common, like balanced funds. As target-date
funds, which are usually funds of funds,
are the largest and fastest-growing subset
of balanced funds, we thought it was important
to include that structure.
Recent Trends
A comparison with five-year investor return gaps
illustrates a key trend: Diversified U.S. equities
showed a positive gap over that period, with
a robust asset-weighted investor return of 11.73%,
0.67 percentage points higher than the average
return. The market has been relatively
52
Morningstar August/September 2018
Asset Class
0
2
Asset-Weighted Investor Return
Alternative
-1.31
4
6
8
Average Total Return
0.09
Balanced
5.63
International Stock
5.93
3.99
2.95
3.49
2.23
Sector Stock
5.81
Taxable Bond
3.01
6.42
3.89
U.S. Stock
8.32
U.S. Stock & Sector Stock
8.15
All Funds*
5.53
-2%
10
0
2
4
8.93
8.36
5.79
6
8
10
Source: Morningstar. Data through 03/31/2018. Returns are annualized.
*All Funds figures exclude funds of funds.
stable and consistently rising, and thus the best
of both worlds for U.S. equity fund investors.
The gap for balanced funds was smaller for the
five-year period, only 2 basis points, but still
positive. For international equity, muni bonds, and
taxable bonds, the gaps also shrank relative to
the 10-year period, though they remained negative.
The gap for alternatives funds also narrowed, but
it flipped from positive to negative territory:
There was a 46-basis-point gap on asset-weighted
investor returns of 1.21% annualized. As
mentioned, the 10-year figures were likely boosted
by survivorship bias, but the number of alts
funds with investor return figures triples when
we go to the five-year record. As a result,
the survivorship bias is likely smaller and reflects
the fact that investors have had a hard time
picking winning funds. Also, they tend to
give up on alts funds more quickly than those in
other asset classes.
Looking at the longer-term gaps for individual alternatives categories, we found that dismal
investor returns were not limited to bear-market
funds. Multialternative funds produced a poor
investor return of 0.00% over 10 years. Marketneutral funds made only 0.32% for investors, while
long-short had a more tolerable 3.07%
annualized figure. All three had a gap of greater
than 100 basis points per year. So, the funds
produced poor returns, and investors did a pretty
poor job of timing them, too.
Lessons Learned
Over the years, we've seen some strong themes
emerge among funds with strong investor
returns. Low-cost and relatively low-risk funds tend
to work better for investors: Low costs
bolster returns, and lower risk makes extreme
performance less likely.
Understanding your fund will also go a long way
to ensuring you make the most of it. Trailing
returns can mask some highs and lows. Simply
going back over calendar-year returns to see if you
can handle a repeat of the worst year (usually,
that's 2008) can be useful.
Finally, 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. K
Russel Kinnel is director of ratings, manager research with
Morningstar Research Services.
Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2018
Contents
Morningstar Magazine - August/September 2018 - Cover1
Morningstar Magazine - August/September 2018 - Cover2
Morningstar Magazine - August/September 2018 - 1
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Morningstar Magazine - August/September 2018 - Contents
Morningstar Magazine - August/September 2018 - 4
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