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It’s time for our annual look at how well investors are
making use of mutual funds. I do this by looking
at the average investor’s returns versus the average
fund’s returns.
We look at monthly fund flows and monthly returns,
then we weight those by asset size to come up with
an estimate of returns for the average investor. We
then compare those figures with the average fund
return on a category and asset-class basis. The gap
between those returns tells us how well investors
timed their investments. The average investor return
is really the bottom line, though. Ideally, you want
no gap in returns and a high average investor return.
Surprise! The Investor Returns Gap Shrinks
The figures through
2014
are intriguing. Not only did
the gap shrink, but the typical investor’s return also
rose. Overall, the average investor enjoyed a
10
-year
return of
5
.
21%
compared with a
5
.
75%
return for
the average fund, giving us a
54
basis point returns
gap. That compares with a
4
.
8%
return for the typical
investor versus a
7
.
3%
return for the average fund
through the end of
2013
. So, the gap shrank
and
the
average investor return rose. Not bad.
The biggest change came in the balanced/allocation
group, where the gap shrank to
2
basis points from
212
basis points. U.S. equities also saw the gap shrink to
98
basis points from
166
basis points. Taxable bonds’
gap shrank to
69
basis points from
222
basis points.
You can see some of the changes in the shorter-term
figures. Most asset groups had a positive gap for
the trailing three years and an only slightly negative
gap for the trailing five years. For example, U.S. equity
investors enjoyed a
19
.
31%
annualized return com-
pared with a
18
.
73%
average fund return for the past
three years, producing a positive gap of
58
basis
points. For the past five years, they enjoyed a
13
.
89%
gap versus a
14
.
23%
average return, producing a
modest negative
34
basis point gap. Why the improve-
ment? Virtually everything except commodities has
risen dramatically the past three and five years. That
meant investors could hardly go wrong.
In addition, the long run of the equity bull market is
much easier on investor returns than wrenching
pivot years when big gains turn to big losses or vice
versa. Thus, bear markets and the dramatic snap-
backs seen after the past two bear markets are the
worst environment for fund investors. Conversely, a
long-running move in one direction produces a posi-
tive reinforcement cycle. The
10
-year figures now
have the pivot years from the
2000
–
02
bear market
out of the system, and the three- and five-year figures
are further from the more recent bear market.
The biggest disappointment in the data is for muni-
bond funds. There, the average investor netted a
mere
2
.
36%
compared with
3
.
66%
for the average
fund, thus leading to a hefty
130
basis points gap
for the trailing
10
years. That’s rather dismal consid-
ering that muni bonds are a fairly low-risk/low-return
asset class that should not lead investors to have
big emotional swings. Yet we’ve had two muni scares
in recent years: Meredith Whitney proclaiming a
disaster that never happened and Puerto Rico and
Detroit bankruptcies that were a problem for some
Mind the Gap 2015: Better
Results for Investors
Fund Reports
4
Amer Funds Income Fund of Amer
Buffalo Mid Cap
T. Rowe Price Dividend Growth
Vanguard REIT Index
Morningstar Research
8
Fund Company Stewardship
Report
The Contrarian
10
Making the Most of Funds With
More Than One Subadvisor
Red Flags
11
Funds Swimming in Debt
Market Overview
12
Leaders & Laggards
13
Manager Changes and News
14
Portfolio Matters
16
Retirement Withdrawal
Strategies
Tracking Morningstar
18
Analyst Ratings
Income Strategist
20
The Road Gets Bumpier for
Long-Term Muni Funds
FundInvestor 500
22
FundInvestor 500 Spotlight
23
Follow Russ on Twitter
@RussKinnel
RusselKinnel, Director of Fund
Research and Editor
FundInvestor
March 2015
Vol. 23 No. 7
Research and recommendatio s for the s riou fund investo
SM
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