Timing the market with your fund investments can be costly, especially if you are a cross-border investor using Luxembourg-domiciled mutual funds. Some 27 percent of the total return in your portfolio - nearly one third - could be at risk, according to an analysis by data specialists at Morningstar.
Morningstar has taken a close look at how investors have navigated turbulent markets between July 2018 and June 2023. The study included cross-border fund hubs like Luxembourg, which represents some 55 percent of European assets under management, Ireland, the United Kingdom as well as Hong Kong and Singapore.
The study found that “a worrying large share of total returns never reached investors’ accounts,” Morningstar concluded. In Luxembourg, it found a gap of 82 basis points between asset-weighted total and investor returns, or 27 percent of the total annualised returns. In Ireland, that gap was 73 basis points, of 18 percent of the total returns.
In the United Kingdom, investors lost 32 basis points of total annualised returns from timing their inflows and outflows. Investors in Australia lost 40 basis points, while those in Hong Kong, with a loss of 53 basis points, also lost less than in Luxembourg and Ireland.
“Our study shows that often investors would have done best by staying with their investments rather than attempting to time the markets in search of big gains from gimmicky funds. Less volatile and simpler funds yielded better end-results,” said Matias Möttölä, director of manager research at Morningstar.
Cross-Border Europe (Ireland and Luxembourg)
“Markets have been difficult to navigate in recent years,” he said in a statement. “At times markets have been exuberant, tempting investors to chase returns in areas such as technology stocks, while events such as the onslaught of the Covid-19 pandemic and the Russia-Ukraine war led many to flee their funds in fear of losses.”
For this “Mind the Gap” study, Morningstar researched around 7,500 funds domiciled in Luxembourg and Ireland. These fund domiciles represent a large collection of investors with capital from all over Europe as well as from Asia. “On the whole, the investor experience has been somewhat disappointing,” Morningstar said.
Cross-border investors struggle particularly within equities, the largest market by assets under management. In Luxembourg, behaviour gaps between open-ended mutual funds and ETFs fell to 132 basis points per year, while in Ireland that gap reached 91 basis points.
Morningstar said its numbers showed that investors tended to do better in large funds, pointing to a “painfully high” investor return gap of 161 basis points when both the Irish and Luxembourg domiciles were included. This number is far higher than the gap of 32 basis points than the gap of 32 in a previous Morningstar study.
Annualised returns vs Investor returns
