Morningstar's Annual "Mind the Gap" Study Finds U.S. Investor Return Gaps Closing In as Fund Industry Grows in Size and Maturity

CHICAGO, Aug. 18, 2020 /PRNewswire/ -- Morningstar, Inc. (Nasdaq: MORN), a leading provider of independent investment research, today published its annual study of U.S. investor returns, "Mind the Gap," which measures how investors' actual results stack up compared with reported total returns. The study estimates the performance of the average dollar invested in mutual funds and exchange-traded funds and compares it to the fund's time-weighted return. The difference, or "gap," represents the impact that the timing of investors' purchases and sales had on the investment outcomes they achieved. For the trailing 10-year period ended Dec. 31, 2019, Morningstar found that the areas that are home to the bulk of investors' assets in the U.S. have shown narrower return gaps over time. Two of the largest category groups—U.S. equity funds and allocation funds—fared the best, showing positive return gaps.

"While investor returns reflect a variety of factors and include some outside investors' control, the fact that the 'gap' has steadily declined for the past two 10-year periods is notable and suggests the investor experience has improved over time," said Amy C. Arnott, portfolio strategist, Morningstar. "We found that dollar-weighted returns significantly improved once the bear market of 2008 was dropped from the trailing 10-year period in 2018 and continued improving for the period ending in 2019. We're seeing a maturation of the fund industry as it grows in size and net cash inflows and outflows start carrying less weight."

Key highlights from the study include:

• The gap between investor returns and reported total returns is closing in. In aggregate, the returns that investors experienced were only slightly lower, by about 5 basis points per year, than reported total returns over the trailing 10-year period.
• Allocation funds—which combine stocks, bonds, and other asset classes—fared the best, with a positive gap of 40 basis points. U.S. equity funds, which account for a large majority of investor dollars, also showed a positive gap of 29 basis points between investor returns and total returns.
• The gap remained negative in some category groups, including alternative funds, specialty equity funds, and municipal-bond funds. All three showed negative return gaps in part because of shifting cash flows that were also poorly timed, underscoring the fact that they can be more difficult for investors to use effectively.
• Of the seven major U.S. category groups, four have shown improving return gaps over the past five 10-year periods. For example, the gap between investor returns and total returns for U.S. equity funds has turned positive after negative return gaps for three of the previous five 10-year periods, which in part reflects 2008 dropping out of the 10-year period starting in 2018. Most of the category groups with the largest asset bases have improved, meaning that the average investor experience for the bulk of investor dollars has improved over time.
• Funds with lower volatility fared better across category groups, with a few exceptions, notably alternative funds and municipal-bond funds. Investors in less-volatile funds within each category have generally had better results in dollar-weighted terms. Overall, the general trend of better investor returns for funds with lower volatility underscores the importance of factoring in volatility to investment decisions.
• For the first time, the study includes data illustrating a hypothetical scenario in which an investor contributed equal monthly investments, or dollar-cost averaging, to funds in each broad category group. The study found that in areas with positive investor-return gaps, investors following a systematic investing approach would have fared worse. Conversely, investors would have fared significantly better by taking a dollar-cost-averaging approach in the category groups with the largest negative return gaps, such as international equity and sector equity funds.

The "Mind the Gap" study is available here and an article summarizing the findings is available on the Morningstar.com here.

About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, retirement plan providers and sponsors, and institutional investors in the debt and private capital markets. Morningstar provides data and research insights on a wide range of investment offerings, including managed investment products, publicly listed companies, private capital markets, debt securities, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with approximately $205 billion in assets under advisement and management as of June 30, 2020. The company has operations in 27 countries as of June 30, 2020. For more information, visit www.morningstar.com/company. Follow Morningstar on Twitter @MorningstarInc.

Morningstar's Manager Research Group consists of various wholly owned subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC. Analyst Ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst Ratings are based on Morningstar's Manager Research Group's current expectations about future events and therefore involve unknown risks and uncertainties that may cause such expectations not to occur or to differ significantly from what was expected. Analyst Ratings are not guarantees nor should they be viewed as an assessment of a fund's or a fund's or separately managed account's underlying securities' creditworthiness. This press release is for informational purposes only; references to securities or a separately managed account investment strategy in this press release should not be considered an offer or solicitation to buy or sell the securities or to invest in accordance with that strategy.

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