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By Christine Benz and Russel Kinnel | 02-18-2015 11:00 AM

Are Investors Still Late to the Party?

The gap between investor returns and average fund returns persists across most asset classes--but there is a bright spot, says Morningstar's Russ Kinnel.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Morningstar Investor Returns data provide a clear depiction of investor behavior. Joining me to discuss some current research on that topic is Russ Kinnel. He is director of manager research for Morningstar.

Russ, thank you so much for being here.

Russ Kinnel: Good to be here.

Benz: Russ, in your cover story in Morningstar FundInvestor, which is coming out in early March, you took a look at investor-return data, asset class by asset class. Before we get into what the data are telling you about investor behavior, let's just talk about this investor-return statistic and how we arrive at it.

Kinnel: It's a little complicated. Essentially, what we are doing is we are asset-weighting flows in individual funds, then rolling that up and comparing those returns with the average returns of all funds. What that [shows] us is the gap [between the] average investor versus the average fund. So, if there is a big gap, we know something is not working. We're not getting quite the right usage. Or if it's a small gap, maybe people are using the funds right. So, it's kind of complicated; but if you just think about it as average investor return versus average fund, it's really kind of simple in the end.

Benz: So, the main idea is to tell a tale about investors' timing: How well have they made their timing decisions, their purchase and sales decisions, within these various categories?

Kinnel: Exactly. A big gap means the timing hasn't been great. A small gap means it's been pretty good.

Benz: Let's start with domestic equity. When you look at the recent rally that we've had in domestic equity, have investors been able to capture that or did they get to the party late?

Kinnel: A little of each, really. So, investors coming out of the bear market in '08 kept redeeming for a number of years, in general, in U.S. equity, though not on a huge scale. So, what that means is they captured some of those gains--still had a pretty good overall return, but not all of them. Another element of that story is kind of subtle; it goes all the way back to the beginning of that 10-year period. Coming out of that bear market, people took about a year to come back to equities; but once they did, they did so in a big way, and that helped their returns going forward, whereas with this more recent bear market, people were much slower to dive in and, therefore, missed a little more of the returns.

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