Mutual Fund Investors: Still buying high and selling low

Published on March 22, 2013 by Guest Blogger

I recently watched a Yale University Finance lecture on YouTube, delivered by guest lecturer David Swenson. I would recommend this video to those interested in mutual fund investments. Swenson is relatively well known in the investment community for having delivered consistently high returns during his more than 25 years as CIO of the Yale endowment. He is also regarded by some as something of a maverick. He must be doing something right, because he has managed to grow the endowment from USD1bn to around USD17bn.

Swenson’s remarks about mutual fund investors struck a chord with me from my days as an equity market strategist. My team used to produce mutual-fund flow reports, showing net subscriptions and redemptions by category of mutual fund. Jardine Fleming’s research on global mutual fund flows mirrored the conclusions Swenson had reached by looking at 10 years of subscription data from all US mutual funds. He noted that investors, in aggregate, consistently achieved much lower dollar-weighted returns than the time-weighted returns on mutual funds. In other words, mutual-fund investors tend to buy high and sell low.

One conclusion David reached was that market timing was a sucker’s game, and the key long-run success factor is correct asset allocation rather than market timing or security selection. My own thoughts have been that mutual fund investors seem to have been overly influenced by historic returns. They tend to buy funds after they have gone up. This is reflected in the advertising issued by many fund management groups, which highlights the funds that have performed the best historically.

I looked up the Investment Company Institute 2012 Investment Company Fact Book for some up-to-date statistics on the US market. US equity funds had six consecutive years of withdrawals totaling USD471bn as of December 2011. Equity funds’ share of mutual-fund assets under management funds fell to 45% of all US mutual-fund assets by the end of 2011 from 57% at the end of 2006. Some of this is probably attributable to the retirement of baby boomers, but a lot of it reflects the general disillusionment with the poor market returns of the past 10 years. However, I can’t help feeling that retail investors and some institutional investors are still trapped in a much-repeated pattern of selling when the market is low and buying when the market is high!

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