The behavior gap is alive and well in Europe. Much like U.S. investors, our European counterparts make similar mistakes.
This shouldn’t be a surprise. Decisions around what fund take its past returns into account. Everyone does it to some degree. We want to make money so we look for funds with a history – however limited – of positive results. The behavior gap is a self inflicted cost of buying a fund after it performs well and selling after it performs poorly.
Morningstar updated its Mind the Gap study for Europe this week (a link to the full report is below). The study focuses mostly on the past five years.
The study found a few things led to lower investor returns:
- The gap between total returns (time-weighted returns) and investor returns (money-weighted returns) of European open-end funds’ in the five-year period through 31 July 2016 was widest in alternative funds (58 basis points per year on an asset-weighted basis). The asset-weighted average gap was also higher than the average in equity categories (39 basis points).
- For all funds, the returns gap came in at 34 basis points.
- The phenomenon of bad timing is widespread. Within equity funds, timing has done the most damage within concentrated funds, such as single-country emerging-markets funds and sector funds, which tend not to be used as core holdings.
- Within equity, investors have done clearly better in index funds than in nonindex funds, especially compared with high-cost active funds or those with high standard deviations.
- In allocation and fixed income, investors have been best off investing with parent companies that are positively rated by Morningstar analysts.
- For allocation and equity funds, those with smaller average assets under management in the last five years have generally had below-average total returns and investor returns
The widest gaps persist in alternative, sector, and single-country emerging market funds. As the study points out, these three categories typically fall outside of a portfolio’s core holdings. It’s probably not a big leap to assume investors are trading in and out of these funds trying to boost returns but getting the opposite result.
Morningstar Mind the Gap 2016 – Europe
- The Biggest Money Mistakes We Make – WSJ
- How Investors Should Deal With Surprises – M. Housel
- Published Results Impact Future Results – L. Swedroe
- If You Want to Influence People Use ‘Pre-Suasion’ – R. Cialdini
- Jamie Dimon Interview at The Economic Club (video) – Youtube
- Marc Andreessen at Startup School SV 2016 (video) – Youtube
- Morgan Housel on Reading, Writing, Filtering Information (podcast) – Knowledge Project
- An Interview With Robert J. Shiller on Behavioral Economics – Pacific Standard
- Why Tim Cook is Steve Ballmer – VentureBeat
- The Weird Economics Of Ikea – FiveThirtyEight