Morningstar - Q1 2020 - 22

Dispatches

investment opportunities. In light of this, we are
concerned that the group has not taken action to
manage capacity."

European Investors Lost Out by Bad Timing
Average of Rolling Five-Year Returns From 01/01/2010-12/31/2018.

Investor Return
Lindsell Train estimates the fund could comfortably
grow from its current level of GBX 9.5 billion to
GBX 12.5 billion. But Brunt says the boutique nature
of the firm means it "does not have the most
sophisticated risk systems," which has "left the
group behind the curve in assessing capacity."
Train is the latest high-profile manager to be
downgraded by Morningstar analysts
under the revamped Morningstar Analyst Rating
methodology. In November, analysts
downgraded Mark Barnett's Invesco Income
and Invesco High Income funds from Bronze to
Neutral amid concerns about the manager's
exposure to small and illiquid investments. Just
weeks later, Barnett was sacked by the board
of the Edinburgh Investment Trust, which
he has managed since 2014, after a sustained
period of poor performance.
Holly Black is a senior editor with Morningstar UK.

Mind the Gap: Europe
GREATER EUROPE

European Union

Morningstar's Mind the Gap 2019 report revealed
that errors in timing of subscriptions and
withdrawals have cost European investors on
average 53 basis points per year from 2010-18-
more than most of their global peers. Only investors
in Singapore fared worse. Investors in the
United States lost 45 basis points per year to bad
timing, and investors in Taiwan lost 21 basis
points. Meanwhile, investors in Australia, South
Korea, and the United Kingdom came out
slightly ahead.
We measure investor success by our wellestablished returns gap concept, calculating the
difference between investor (money-weighted)
returns and total (time-weighted) returns.

22

Morningstar Q1 2020

Total Return
7.52

8%

7.84

6
4.78
4.04

5.31
4

3.72
2.87

3.28
2

0.98

Asset Allocation

0.90
Alternatives

0

Equity

Fixed Income

Overall

Source: Morningstar.

When the gap is negative, it indicates that
investors earned less than what they would have
by merely holding on to an average fund
through the full period. Investor returns measure
what the average euro has earned. If large
amounts of assets were withdrawn from a
fund just before its value shot up, the investor
return would be worse than the fund's
total return, which does not account for flows.
We examined funds domiciled in Europe's three
largest fund markets-France, Ireland, and
Luxembourg-as a proxy for Europe, whereas our
2017 study looked only at Luxembourg. This
added depth to our data set while keeping the data
set manageable. We also added exchangetraded funds to the mix, but we measured only
monthly flows for both open-end funds and
ETFs. This left out a lot of the short-term trading
noise in ETFs and focused on longer-term
investor behavior. We analyzed returns during five
rolling five-year periods, starting with Jan. 1,
2010, through Dec. 31, 2014, and ending with
Jan. 1, 2014, through Dec. 31, 2018.
Equity funds are typically a pain point for investors
because of their higher volatility. However, the
average gap was smaller than that for fixed-income
funds. That's likely because equity markets
overall have been benign. Despite short bouts of
volatility in late 2011, early 2016, and late 2018,
stock indexes had mostly inched upward. That kept
investors' worst instincts in check.

In contrast, the euro crisis threw fixed-income
markets into turmoil. This showed particularly in a
negative 0.68-percentage-point behavior gap over
the 2010-14 five-year period for bond-fund
investors. The eurozone crisis escalated in 2011 and
sent down the prices of Southern European
government bonds before the European Central
Bank promised to do "whatever it takes" in July
2012. However, a new problem arose as the
massive stimulus and quantitative easing pushed
government bond yields below zero in some cases.
This led investors to move their assets around in
search of a reasonable yield. This has mostly
been in vain: Investor returns for bond funds in
the 2014-18 period clocked in at a meager
1.40% annualized, 31 basis points lower than the
average bond-fund total return.
On the plus side are positive gaps within allocation
categories. On an asset-weighted basis, investors
earned a higher return on their average euro
in allocation funds than they would have gained by
investing an equal amount in each fund for the
whole period. The asset class enjoyed considerable
popularity, and investors mostly added to
their investments rather than trying to buy and sell
at the right time. Investors also moved toward
slightly riskier and more-flexible allocation
funds in recent years as bond-heavy cautious funds'
expected returns had diminished.
A small positive gap within alternatives is
surprising considering our previous research, which
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