Morningstar Magazine - August/September 2017 - 36

Strategies

Mind the Gap, Global Edition
Investor returns show the costs of bad
timing around the world.

40

Tax Wise
20 IRA Mistakes to Avoid

43

The Inefficient Frontier

46

Fee Study: Great Migration

50

Manager: A Global Success
Passive: Emerging-Markets Edge
Equity: Bumpy Travel Ahead

RESEARCH

Russel Kinnel

Quant U

Investment Research

Best Ideas
52
54

Morningstar expanded its Mind the Gap study
from the United States and Europe to its
first ever global look at investor returns across
markets and asset classes. Although the five-year
annualized investor returns gap ranged widely
from region to region, from negative 1.4%
to 0.53% for the year ended 2016, some common
themes emerged. Investment vehicles that
required systematic investment produced better
investor returns, as did lower-cost funds.

Investor returns are money-weighted returns, as
opposed to time-weighted returns, which
are the standard way of displaying an investment's
total returns. We calculate investor returns
for a single fund by adjusting returns to reflect
monthly asset flows and their compounding
effect over time to better illustrate the returns
captured by the typical investor. Generally, investor
returns fall short of a fund's time-weighted
returns because, in the aggregate, investors tend
to buy after a fund has gained value and sell
after it has lost value. Thus, they miss out on a
key part of the return stream.
Gaps Around the Globe

Investor returns are a way to understand when
investors use funds well and when they
don't. Although much has been written about
active mutual fund managers lagging their
benchmark, there is less attention to investors
lagging their funds' performance.

The main challenge we face in calculating investor
returns globally is that they require monthly flows
at the share-class level. That data has become
readily available in most markets in recent years.
We are now able to calculate aggregate investor
return data for the trailing five years in many

EXHIBIT 1

Investor Return Gaps Around
the World For the first time, we
measured asset-weighted investor
returns in regions outside of the
United States and Europe.
Average Investor Return
Average Fund Return
■ Total Return (Do Nothing)
■
■

Luxembourg
10-Year Investor Return
1.25
2.14
1.76

4.31
4.26
4.98

6.52
7.19
6.75

Concentrated
Equity

1.20
2.73
2.32

4.09
4.08
4.49

8.47
7.55
6.04

2.30
3.00
2.26

4.36
5.15
5.31

Diversiﬁed
Equity

All Funds

36

Morningstar August/September 2017

Canada
10-Year Investor Return

Allocation

Fixed-Income

Source: Morningstar. Data as of 12/31/2016.

United States
10-Year Investor Return

3.25
3.52
3.26
2.24
2.98
2.52

2.99
3.72
4.30
3.96
4.33
5.00

10.95
11.55
10.29
3.89
4.04
3.57
7.33
8.42
6.90

Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2017

Contents
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