Investors are Behaving Less Badly

New evidence suggests that investors may be shifting their habit of buying high and selling low, according to a recent article in The Wall Street Journal. The article reports that a Morningstar study published in June found that the average mutual fund gained 5.79% annually over the 10 years ended March 31st while the average investor gained 5.53%–the 0.26 difference representing a much narrower gap than in the past. Over the decade ending 2013, for example,… Read More

Tracking Errors and What They Mean to Investors

In a recent Morningstar interview, the firm’s director of manager research, Russ Kinnel, defines tracking errors and discusses how they relate to mutual funds. Kinnel differentiates tracking error from standard deviation, which “tells you the absolute amount up and down.” Tracking error, he explains, tells investors about “volatility in a fund that’s not explained by its index’s movement.” Lower tracking error, he says, means that the fund “tends to hew pretty close to the index… Read More

Active Share is not a Predictor of Fund Performance

At a time when fund expenses are increasingly under scrutiny, some have turned to active share (the level of correlation between an index fund and its benchmark) as a predictor of fund performance and a means of justifying hefty management expenses. A higher active share (on a scale of 0 to 100) means a fund bears less resemblance to its benchmark. Some would argue that this indicates a higher level of active management, a higher… Read More

What are Investor Returns, Really?

There is some confusion around why the total investor return data published by Morningstar differs from the returns that investors are actually earning. Russ Kinnel, director of manager research for Morningstar, unravels the discrepancy. Investors’ actual returns, explains Kinnel, are the dollar-weighted returns that reveal how well investors used the fund and how well they timed their transactions. If, for example, investors buy into a fund because it’s showing great returns, this flood of dollars… Read More