(Pictured: Tim Murphy)
By David Chaplin
Real returns achieved by retail investors generally fall below published fund performance figures, a new analysis by Morningstar Research shows. The study, to be published this week, supports the age-old notion of ‘fear and greed’.
The analysis by Morningstar head of manager research, Tim Murphy, suggests the ‘fear and greed’ behavioural cycle dampens real return. It is based on a study for NZ investors.
Murphy said the research – which matches findings in other jurisdictions – found the “behavioural gap”, where people tend to buy and sell on recent fund performance results, can materially affect actual investor returns.
“In aggregate, investors time their decisions to buy and sell funds badly,” he said. “And their timing is worse the more volatile the asset class or fund is.”
The research measured a range of NZ fund returns on an asset-weighted basis – which takes into account monthly flows and the consequent compounding effect – rather than the industry standard time-weighted performance figures reported by managers.
“[Asset-weighted returns] quantify the typical investor experience,” Murphy said.
While the Morningstar ‘Investor Returns’ data shows NZ investors mostly lagged reported time-weighted performance, the results varied across fund structure and asset class.
Murphy said the ‘behaviour gap’ was most apparent in the open-ended fund sector compared to the KiwiSaver/superannuation fund market – for obvious reasons.
“KiwiSaver members usually contribute regularly and are not too active in making investment choices, so the behavioural biases are not as influential,” he said. “But where investors have more discretion the behaviour gap is larger.”
In the open-ended NZ fund space, Morningstar found the most significant behaviour gap in aggressive multi-sector funds over a three-year period, where investor returns were 2.4 per cent less than fund time-weighted results. Investors in open-ended products also experienced a large underperformance in Australasian equity funds over a five-year stretch (down 1.53 per cent) and in moderate multi-sector funds over three years (0.8 per cent behind).
The behaviour gap for KiwiSaver (which forms the bulk of Morningstar’s ‘insurance fund’ category) was more muted overall. However, this group of investors undershot time-weighted returns by 0.86 per cent for NZ equity funds over the five-year period while also falling behind significantly in the multi-sector aggressive and growth sectors over three years.
Despite the skew to underperformance, the Morningstar study did note a few instances where investor returns marginally outperformed time-weighted results.
A similar Morningstar study in the US found aggregate investor returns across all funds underperformed time-weighted return measures by 53 basis points. The US investor returns ranged from -1.32 per cent for municipal bond funds to an outperformance of 26 basis points in US sector funds.
Murphy said the research highlights why investors need to avoid chasing performance when buying managed funds.
He said the NZ investor returns study added to the global body of work in the field but further research would prove useful.
Morningstar has also released its latest ‘Sustainability Ratings’ for NZ funds with six products out of the 44 rated by the research house earning a ‘high’ ranking, including three from AMP Capital, two Harbour Asset Management funds and the Russell Investments NZ shares fund.
Morningstar struck a deal in 2015 with global environmental, social and governance (ESG) researcher, Sustainalytics, to provide data for the group’s sustainable ratings, adding NZ funds to the process this February.
In other research highlights to be presented to an NZ audience this week, Morningstar reports Oceania as the only region outside the US where flows to passive products have outgunned active funds.
During the 2015 year passive products saw net flows of US$4.7 billion in Oceania (where Australia dominates regional figures) compared to US$3 billion in ‘non index’ funds, the Morningstar data shows. In the US over the same annual period, index funds garnered about US$400 billion in net flows compared to net outflows of $100 billion in the active fund sector.
Australia was also the fastest-growing exchange-traded fund (ETF) market in the world last year, increasing by almost 35 per cent over 2015. Globally, ETF assets hit almost US$3.5 trillion as at the end of 2015, the Morningstar figures show.
– Investment News NZ
