Why do investor returns differ from the returns reported by fund managers, exchange tradedfunds (ETFs) or index returns?
There are several reasons why actual investor returns can be different to the reported total returns on fund manager websites. Here are some common factors:
Timing of investments: Investors often enter or exit funds at different points in time, depending on their individual circumstances. If investors buy into an investment when it has experienced significant gains or sell after it has declined, their actual returns can differ from the reported total returns. This is known as “timing risk” and can result in suboptimal performance.
Reinvestment of distributions: Fund manager reported returns include the re-investment of distributions. If you are not re-investing investment earnings, then your returns for the particular investment will likely be lower than the reported earnings.
Insurance premiums: Managed funds report their returns net of the fund manager fees. However, if you are paying your insurance premium through your investment/super portfolio, then your total returns will differ to that reported by the fund manager.
Taxes: Tax implications can significantly affect investors’ actual returns. When funds distribute capital gains or dividends, investors may be liable for taxes on these distributions. The timing and rate of taxation can vary depending on individual circumstances and tax laws. The reported total returns may not account for the tax impact, resulting in lower actual returns for investors after taxes.
Behavioural biases: Investor behaviour has the biggest an influence their returns. Many investors tend to buy into an investment after a period of strong performance and sell during market downturns, driven by emotions such as fear and greed. These behavioural biases can lead to suboptimal timing decisions, impacting actual returns negatively. The below example illustrates this using the ARK ETF Trust (not available in Australia). The difference is due to most investors buying after the ETF achieved sky high returns and then selling after the ETF had a significant fall in value.
Source: above illustration provided by Morningstar
The gap between shareholders’ actual returns and reported total returns underscores the perils of getting caught up in the hype of funds with high-flying returns, which usually leads to disappointing results.
It’s important for investors to carefully consider these factors and understand that reported total returns may not reflect what they will personally experience when investing in managed funds, ETFs or direct shares. It’s advisable to not over-react to short-term market movements and focus on the long game. Consulting with a financial advisor can help investors avoid emotionally-based investment decisions and thereby achieve optimal returns.
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