Morningstar Advisor - December 2012/January 2013 - (Page 64)
Gray Matters
Performance Gaps
By Terry Tian
Investors have a worse returns experience in alternatives funds than they do in traditional funds.
The return an investor gets from a mutual fund does not only depend on the fund’s published total return, but also on the timing of the investor’s buy and sell decisions. To better gauge the real experience of average investors, Morningstar introduced Morningstar Investor Return in 2006. Our studies have shown that Investor Returns generally fall short of total returns in most traditional mutual funds, some more than others. Typically, investors’ experience in gimmicky or niche strategies, such as technology and natural resources, lag the Investor Returns in more-core holdings.
With the rapid growth of alternative mutual funds in recent years, we are now examining investor behavior and returns in these nontraditional investments to see if they are any better or worse than in traditional investments.
What Is Investor Return?
additions or redemptions. In reality, however, this is hardly the case, as mutual funds allow daily subscriptions or redemptions. Investor Return tackles this issue by taking into account a fund’s total net assets at each month-end. Returns achieved during months with larger asset bases will be overweighted relative to those months with large redemptions. Suppose a fund with beginning net assets of $50 million returned 10%, 1%, and negative 5% in three consecutive months, respectively. Also, suppose the fund received
The traditional total return calculation measures the change in a fund’s net asset value over a given timeframe. This methodology assumes that investors hold the fund throughout the entire period without any
64 Morningstar Advisor December/January 2013
Table of Contents for the Digital Edition of Morningstar Advisor - December 2012/January 2013
Morningstar Advisor - December2012/January 2013
Contents
Contributors
Letter From the Editor
What Stands Between Me and Stupid
Why Do You Use Dynamic Funds of Funds?
Serving Clients and Community
How to Pick an ETF Managed Portfolio Strategy
Tactical View of Risk
Investments á la Carte
Investment Briefs
Unbundling ETF Managed Portfolios
Risks Loom Over Telecom Industry
Outsourcing Asset Allocation
ETF Managed Portfolios on the Rise
Age-Based Options Take Over 529 Industry
How the Landscape for Advisors Is Changing
Mark Egan Embraces Volatility
Alpha, Beta, and Now … Gamma
Performance Gaps
Gains in Momentum
Companies Where Management Teams Add Value
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Once and Future King
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