Findings on Investor Returns in Mutual Funds

Cheri Franklin |


Many investors are unaware that Morningstar® reports two different types of returns for mutual funds. The one we are all familiar with is the “Trailing Total Return” which tells us the annualized return that would have been received by someone who bought and held the fund over the period while reinvesting all distributions received (both dividends and capital gains). However, many investors make multiple purchases or sales of a fund. These can be for perfectly valid reasons such as a retirement plan participant who is making regular purchases with each paycheck or a retiree who is taking regular distributions to support himself. Unfortunately, they can also occur due to inadvisable reasons like market-timing or return-chasing.

The Morningstar measure that tells us how investors as a whole have done in a fund is called (You guessed it!) the “Investor Return.” For example, the Fidelity Contrafund (FCNTX) as of 4/30/2018 had a trailing ten-year total return of 10.15% (ranking in the 33rd percentile in its category) and an investor return of 8.02% (49th percentile). This would indicate the possibility of less-than-optimal behavior on the part of its shareholders. In contrast, the Vanguard Target Retirement 2040 Fund Investor Shares (VFORX) had a trailing ten-year total return of 6.90% (18th percentile) and an investor return of 9.27% (13th percentile), suggesting the likelihood of good behavior by shareholders.

Derek Horstmeyer of George Mason University reported some intriguing findings in an article entitled “Caught in the ‘Return Gap’” (Wall Street Journal, 5/7/2018). The return gap is defined as the difference between the trailing total return and the investor return. Horstmeyer separated funds into categories and calculated the ten-year return gaps. He found that investors in S&P 500 index funds had the lowest return gap of 0.77%. The next lowest was achieved by investors in impact/sustainable funds at 0.93%. The largest return gap was suffered by investors in value funds at 2.16%. They were closely followed by growth fund investors at 1.93%. It is unclear if Horstmeyer was looking only at active funds or all funds in that category. Unsurprisingly, funds geared to institutional investors had a 0.65% lower return gap compared to funds offered to retail investors. Horstmeyer explains this by saying, “the big money is less likely to get caught up in the exuberance of market cycles and can ride out market storms.”

It has been almost a decade since we have had a “market storm” (sorry, we don’t consider the recent volatility to be in that category).  It will indeed be interesting to see how different types of investors behave in the next one.