Thematic fund investors miss out on two thirds of returns due to poor timing

investmentweek.co.uk:

Investors lost more value in focused funds such as those tracking the Morningstar broad themes technology or physical world, compared with more diversified broad thematic peers.

The paper, The Big Shortfall, revealed that investors suffered an average 4.9 percentage point annual return shortfall, with thematic funds offering an average annualised total return over a five-year period to 30 June 2023 of 7.3%, compared with an investor average of 2.4%. when the impact of cash inflows and outflows was considered.

The findings indicate that investors are «collectively poor market-timers» and particularly struggle in thematic funds, as the funds seem to induce more frequent trading and a tendency to buy high and sell low.

Morningstar said investors would achieve better investment outcomes by adopting a more patient buy-and-hold approach.

Investors lost more value in focused funds, such as those tracking the Morningstar broad themes technology or physical world, which experienced gaps of over 500 basis points over the trailing five years, compared with more diversified broad thematic peers, which had a gap of 111 basis points over the same period.

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This was due to technology or physical world funds being centred around a single theme, holding fewer stocks and lending themselves to tactical investing, while broad thematic funds tend to be more diversified, hold more stocks and invest across a range of themes.

Return gaps were found to be wider in thematic ETFs than in thematic mutual funds. This was attributed to ETFs being traded intraday, investing in more focused baskets of stocks and often being favoured as tools for making «tactical bets».

In technology and physical world