Emma Wall: Hello, and welcome to the Morningstar series, 'Ask the Expert'. I'm Emma Wall and I'm joined today by Senior Fund Analyst, Simon Dorricott.
Hello, Simon.
Simon Dorricott: Hi.
Wall: So, we have heard before about the dangers of herd investing. This is the investors get into the top and then sell out the bottom. And there has been some recent Morningstar research that seems to support this concept. It's called Mind the Gap. I think we should probably ask with what is the gap?
Dorricott: Right. Well, the Gap is, we define it is the difference between investor returns and the published total return of the fund. So, the question then is, what are investor returns. And our definition there is a money-weighted return. So, that effectively looks at the returns of the fund and gives a little bit more weight to the returns when the assets within the fund are higher.
Wall: And there is, to sort of boil that down, a lag between what investors are taking home and what they could be taking home, isn't there?
Dorricott: Yes. Well, in a recent research, we've moved the study on from just looking at U.S. mutual funds to look at some funds in the U.K., so U.K. domiciled funds. And the conclusions there were, were the same as we saw on the U.S. studies which are much longer running, and that we've got a negative gap, so we see investor returns slightly lower than the reported returns from funds.
Wall: We do have a couple of reason why this maybe, but one of them is the theory that I had said at the beginning which is that market time is exceptionally hard to do and investors just aren't getting it right.
Dorricott: Yes. Exactly right. So, one reason for this negative gap could well be that investors are following some high returns that have been seen in the past and piling in effectively over the top only to see slightly lower returns in future.
Wall: And of course, even the professionals get timing wrong in the market. We've seen it time and time again, so how do you mitigate this risk of getting market timing wrong?
Dorricott: Well, I think there are a couple of things that investors can do one of which is to invest on a regular savings basis rather than making lumpsum investments obviously spreading those investments over a longer period of time reduces the risk of timings things badly. The second thing I think is ready to focus on having a strategic asset allocation and then investing your flow to maintain that so, regularly rebalancing to that set allocation.
Wall: So, stick to asset allocation and also drip feed to mitigate the sort of volatile nature of fund returns.
Dorricott: Exactly.
Wall: Simon, thanks very much.
Dorricott: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
