The Mind the Gap study has been conducted by Morningstar’s research teams since 2005. The study looks at the returns that investors achieve compared to investment returns. The difference is mostly down to behavioural tendencies that often lead us to act irrationally.

We all inherently know to buy low and sell high. In practice, this is not what many of us do. We often ‘follow the herd’ by investing in funds that have done recently, and we then redeem our assets when markets aren’t doing to well, selling at a loss. It’s easy to see an example of this in practice. We just have to look at the annual Superannuation performance results. The best performing superfunds have inflows immediately after these results are released.

The result of this poor behaviour is a ‘behavioural gap’ in investment returns.

The study looks at six key markets around the world and how they have navigated turbulent markets in the last five years. The study includes Australia, the European cross-border fund hubs of Ireland and Luxembourg (which represented around 55% of European assets under management), the United Kingdom, as well as Asian powerhouses Hong Kong and Singapore. It covers the five-year period between July 1, 2018, and June 30, 2023.

The environment

The study was last conducted in 2019, prior to the Covid-19 pandemic. The newest study encompasses the past five years, which were characterised by the pandemic, as well as the Russia-Ukraine War, inflation and steep rises in central bank rates.

This all resulted in volatility across many markets and asset classes. Across asset classes, the most volatile categories and the most volatile funds within each Morningstar Category typically caused investors to lose more of their returns to timing of inflows and outflows.
These gaps cause by volatility is due to investors struggling to stay the course, and stay invested for the long term. These investors missed a meaningful share of fund returns.

How did each market fare?

All six markets studied had a negative investor return gap over the period. What this means is that the investors’ timing of entering and exiting the market detracted from performance. A hypothetical buy and hold investment fared better.

Mind the Gap annualised returns

Investors in Australia and the UK suffered the smallest losses due to unfavourable timing. The study suggests that this is because of more holistic financial advice in these markets. It is more common in other markets to have funds sold as isolated products.

In previous studies, Australia actually had a positive investor return. This was in the period between 2013-2018 – a healthy bull market. Investors did not have shaky markets to deal with, and this helped with investor performance. This has now turned negative, as investors struggle with the volatility.

Hong Kong was the only market to suffer negative absolute returns as Chinese markets went through a rough patch.

Active vs passive?

The study found that compared with active equity strategies, passive equity funds and ETFs tended to promote healthier investor behaviour.

The study reinforces the idea that investors perform best when sticking to simpler and less volatile products rather than following trends and chasing short-term performance.

You're able to view the full report as well as researcher insights on Morningstar Investor. The continued research into the behavioural gap by Morningstar research also explores:

  • How returns break down across asset classes
  • How return gaps trend over time across categories
  • The impact of dollar-cost averaging, or investing a set dollar amount on a regular schedule

Morningstar Investor subscribers can access the full report here.