People have long thought that market timing was tough, but now a new study from Morningstar seems to prove it. The first UK Mind the Gap study shows that the average investor returns are lower than the reported returns on a fund.
- In most sectors investors get less than the total reported return of the fund
- The exception is single country and sector equity funds, where investors seem to get their timing right
- Are investors bad at market timing? Or simply prone to picking the top funds?
The new study compares the reported total returns from funds with the money-weighted returns, which is designed to illustrate the average investor experience over a five year period. The study aimed to look at how investor’s timing in and out of funds affected their overall return.
That investors aren’t great at market timing will come as no surprise to anyone. The bigger surprise, is that the gap in returns is not vast, and, unusually, is seen more in diversified equity funds than other areas that might be considered more ‘fashionable’, such as single sector funds. Diversified equity funds had a -0.51 percentage points gap against an average of -0.19 percentage points for UK funds.
“ose who have observed investor behaviour for some time will have seen the slavish way that fund flows used to follow performance.”
Those who have observed investor behaviour for some time will have seen the slavish way that fund flows used to follow performance. European equity would have a good run, and little by little investors would pile in. Nowhere was this effect more dramatic, of course, than during the technology bubble. The effect for those investors who were last to the party was disastrous.
Here, the only area that showed a positive gap was the concentrated equities category, which includes single country and sector equity funds. This suggests that when investors decide to take a targeted position in a single area or sector, they are pretty good at timing their entry and exit. Could the contrarian message be getting through?
People may still be performance-chasing, but they are doing it in a different way. They don’t tend to allocate to sectors or countries when they’ve seen punchy returns, but are more strategic. However, they are still allocating to top-performing funds within sectors. This could explain why the phenomenon is being seen in sectors such as diversified equity.
What the study may prove is not necessarily that investors are bad at market timing, but that they are bad at fund timing, know which funds are at the start and end of their performance cycles.