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:

  1. 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
  2. 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.
  3. 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.
  4. 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.
  5. 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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Sofie Korac is an Authorised Representative (No. 400164) of Prudentia Financial Planning Pty Ltd, AFSL 544118 and a member of the Association of Financial Advisers.

Financial Advice Sydney and the North Shore Office based in Gordon NSW

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