(PUB) Investing 2015

March 2015 Vol. 23 No. 7

FundInvestor Research and recommendatio s for the s riou fund investo

SM

Mind the Gap 2015: Better Results for Investors

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

RusselKinnel, Director of Fund Research and Editor

Fund Reports 4 Amer Funds Income Fund of Amer Buffalo Mid Cap T. Rowe Price Dividend Growth Vanguard REIT Index

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.

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

Continued on Page 2