Thematic fund investors lose bulk of returns due to poor timing: Morningstar
Vivienne Tay
INVESTORS in thematic funds have lost more than two-thirds of their total returns due to poorly timed buying and selling behaviour, new Morningstar research has found.
The average total return of thematic funds stood at 7.3 per cent, annualised over the five-year period through Jun 30, but investors only earned a 2.4 per cent return after taking into account the impact of cash inflows and outflows.
“Thus, investors suffered a 4.9-percentage-point annual return shortfall, or gap, stemming from mistimed purchases and sales,” the investment research firm said.
Funds that focused on technology or physical world themes saw the highest loss of over 500 basis points in value by investors over a five-year period, compared with broad thematic funds which were down 111 basis points.
Morningstar said technology, physical world and social-themed funds tend to be centred around a single theme. They also hold fewer stocks, leading to tactical investing. Broad thematic funds, on the other hand, tend to be more diversified as they hold more stocks and invest across a range of themes.
“The average broad thematic fund has 30 more holdings than the average technology-themed fund,” Morningstar said.
Its research also found return gaps to be wider in exchange-traded funds (ETFs) than in thematic mutual funds.
Thematic ETFs, which tend to invest in more focused baskets of stocks, are often favoured for tactical usage and are able to attract large flows. They also offer more concentrated bets, which could result in higher volatility.
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