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Investors in thematic funds hurt returns by trading too frequently: Morningstar

Investors in thematic funds hurt returns by trading too frequently: Morningstar



Investors in thematic funds cut their returns by nearly two-thirds through badly-timed trades, a report by Morningstar Manager Research showed.

Funds that tend to focus on specific themes, such as climate change or artificial intelligence, have drawn investors over the last few years, more than doubling their assets under management since 2018, Morningstar’s data showed.

However, while the average return on thematic funds was an annualized 7.3% over the five-year period through June 2023, investors saw just a 2.4% return, the Morningstar report by senior analyst Kenneth Lamont and director of manager research Matias Mottola showed.

The S&P 500 returned 14% annually on average during that period.

Morningstar’s analysts attributed the disparity in earnings to poor market timing by fund investors. Results were particularly poor in more volatile funds, as investors traded those more frequently and had a tendency to buy high and sell low, they said.

“Most investors would achieve better investment outcomes by adopting a more patient buy-and-hold approach,” said the analysts. The more targeted the thematic fund, the larger was the gap in returns, the study showed. For instance, investors tracking technology funds saw a gap in returns of 5.5 percentage points, compared to a 1.1 percentage point gap in returns on broad thematic funds, Morningstar data showed.

Investors also lost more value in thematic exchange-traded funds (ETFs) than in thematic mutual funds, the report added, given their use to make tactical bets and higher volatility resulting from the funds’ more concentrated holdings.

While funds typically report total returns, investor returns can be a more telling measure because they include the impact of cash inflows and outflows from investors, the study said.

(Reporting by Bansari Mayur Kamdar in Bengaluru; Editing by Ira Iosebashvili and Emelia Sithole-Matarise)



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