Mutual fund investors continue to suffer from buying high, selling low: Morningstar

Investors typically lose when trying to time the market. But some experts like AQR's Cliff Asness and Rob Arnott of Research Affiliates say a little market timing may not be so bad.

Mutual fund investors continue to suffer the consequences of their actions by sometimes zigging when they should be zagging to try and navigate market conditions.

The latest research from Morningstar measuring investor performance against the performance of mutual funds in which they invest, shows that investors still face challenges in using mutual funds correctly.

“Investors tend to buy high and sell low, missing out on a fund’s gains in value,” said Russel Kinnel, chair of Morningstar’s North America ratings committee.

Mr. Kinnel evaluated U.S. open end funds and calculated average asset-weighted investor returns and average total fund returns over 10 years through December, and found that investors cost themselves between 74 basis points and 1.32% per year by mistiming the market. The average annualized investor-returns gap for the 10-year periods ended 2012 through 2015 was negative 1.13%.

“Our investor returns data has shown that investing decisions made a decade ago have an impact that compounds powerfully over time,” Mr. Kinnel said. “The latest data shows that investors still face challenges in using mutual funds correctly.”

The annual study, which Morningstar calls “minding the gap,” underscores the risks of trying to time the market, according to Mr. Kinnel. “We know that, collectively, market-timing is not good,” he said.

The findings and the age-old fund-industry mantra, goes slightly against the grain of comments made earlier in the week at the Morningstar conference in Chicago.

On Tuesday, co-panelists Cliff Asness of AQR and Rob Arnott of Research Affiliates, agreed that even though “market-timing is a sin, sometimes it okay to sin a little.”

That reference was more directed toward professional financial advisers than it was toward the less-sophisticated universes of retail class fund investors.

As Mr. Kinnel illustrated, it is often the fund strategies that contribute to better investor behavior.
For example, target-date funds that are mostly used in retirement accounts saw a negative performance gap in the latest findings of just 17 basis points.

Meanwhile, municipal bond funds saw a gap of 1.32%, which Mr. Kinnel attributed to risk factors brought to light in Puerto Rico and the ill-informed doomsday call by star analyst Meredith Whitney.

“Muni funds was one of the bigger return gaps, which is counterintuitive because muni funds are boring and they don’t move a lot,” Mr. Kinnel said. “But muni fund investors are also a risk averse group,” and therefore overreacted to the news.