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Morningstar Study Examines the Cost of Poor Investment Timing by Investors in Europe

Investors in single-country emerging markets and sector equity most affected 

A new research report from Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, finds that poor investment timing has, on average, cost European investors 0.34 percentage points in missed annualized returns over the past five years, with investors in single-country emerging markets and sector equity funds missing out the most--by 1.05 and 1.38 percentage points, respectively.

The report, “Mind the Gap 2016—Europe: the Effects of Behaviour on European Fund Investors’ Returns”, considers the impact of investment timing on the average investor return from European-domiciled funds in each of the major long-term asset classes as well as within individual fund categories, over a five-year period. The study uses the Morningstar Investor Returns methodology and finds that investors in concentrated, riskier funds are most affected by poor timing, on average earning lower investor returns than the stated total return over the five-year period of the study. At the asset class level, investors in alternatives experienced the largest negative gap between total return and investor return, at 0.58 percentage points. Exceptionally, the study found investor returns for index funds to be greater, on average, than the total return.

Matias Mottola, Senior Manager Research Analyst for Morningstar, comments: “We know from our US studies that actual investor returns fall short of total returns because, in aggregate, investors tend to buy after a fund has gained value and sell after it has lost value. Despite differences in market structures and investment cultures between the United States and Europe, we now have evidence that these costly investor behaviours are also prevalent in Europe, and at what cost. With the notable exception of index fund investors, investors in European funds have suffered average investor returns lower than total returns in practically all types of asset classes and categories, demonstrating a common difficulty in using funds effectively.” 

Further key findings from the report include:

  • Index funds offered the highest average investor returns compared to total returns, with a positive asset-weighted gap of 0.26 percentage points; investors in non-index funds averaged a return gap of negative 0.37 percentage points;
  • Investor returns from equity funds averaged a negative return gap of 0.39 percentage points;
  • Higher-priced funds delivered negative return gaps, particularly in alternative and equity funds;
  • Concentrated developed markets equity funds demonstrated the largest positive return gap for active funds, largely supported by the upward trend for UK equities;
  • Funds with a parent company rated above average by Morningstar manager research analysts have demonstrated better average returns gaps; and
  • Although investors did better with broadly diversified funds, they still lagged the stated fund returns.                     

“The study helps to identify the types of investments where investors typically need to be extra careful, so as not to destroy value by trying to time the market”, Mottola continued. “As the data clearly shows us, investors need to be particularly cognizant of the high potential for poor market timing when entering the more volatile markets such as single-country emerging-market funds, and those providing access to individual equity sectors.” 

The Morningstar report, “Mind the Gap 2016—Europe: the Effects of Behaviour on European Fund Investors’ Returns”, covers the five-year period from 1 August 2011 to 31 July 2016. Data for the study includes European-domiciled open-end funds with comprehensive five-year data at the share-class level for total net assets and returns. Morningstar excluded money market funds from the study.

The Morningstar Investor Returns methodology measures the growth of the average investment in a fund over the period by taking into account cash flows in and out of a fund. Total returns instead measure how a lump sum investment placed at the beginning of a period has performed. For the study, Morningstar calculated investor returns for each share class by weighing its monthly base currency total returns with assets in each share class at the end of each month. The results are summed together to the fund level by weighing share classes with their average assets in Euros for the calculation period. Fund-level investor returns were then analysed by comparing the average fund-level total returns and investor returns across asset classes, category groups, and by factors.

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 540,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on nearly 18.5 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 US$200 billion in assets under advisement and management as at 30 Sept, 2016. The company has operations in 27 countries.