SOHO Finance -- New SBA Loans

Chasing Performance Hurting Investor Returns; Study Cites Mutual Fund Investors' 'Bad Behavior' for Lost Performance

HARTFORD, Conn.--(BUSINESS WIRE)-- Buying high and selling low caused a shortfall of 20% to the average mutual fund investor over the past decade, a Phoenix Investment Partners study shows. The study Investor Behavior and Its Impact on Long-Term Investment Success, conducted by Financial Research Corporation (FRC), indicates that mutual fund investors experienced 20% lower returns on average during three-year holding periods throughout the last decade. Specifically, on a rolling return basis from January 1990 through March 2000, the average mutual fund's mean three-year return was 10.92%, while the average invested dollar gained only 8.7% over the same period.⁽¹⁾

The study cites investors' propensity for chasing performance as a main reason for losing performance, as measured by rising mutual fund redemption rates and shortened holding periods. The study also finds that investors who use financial advisors tend to experience slightly better returns than those who do not rely on professional advice.

"The moral of the study is that investors who make investment decisions based on emotion, not logic, in pursuit of big stock market gains, are more likely to lose out in the long run," said Jack Sharry, President, Phoenix Investment Partners' Private Client Group. "That message resonates especially loudly after a year when the markets gave tech-chasers the roughest ride. Sticking to a long-term diversified financial plan would be a wise resolution for investors to make this year. And as the study suggests, some investors may want to enlist an advisor to help keep them from chasing the latest `hot dot' performers, only to be disappointed later."

According to the study, mutual fund redemption rates have been on the rise over the past four years. In 1996, redemption rates for long-term mutual funds were 17.4% -- but by 2000 those rates soared to 32.1%.⁽²⁾ At the same time, the implied holding period for these funds has been declining steadily. The current holding period for long-term funds was determined to be about 2.9 years, significantly shorter than the 5.5-year holding period in 1996.

Investor Returns Vs. Investment Returns
The study indicates that contrary to their best interests, many investors are purchasing funds based on past performance, usually when they are already at or near their peak, and therefore not participating in the greatest gains. To reach this conclusion, FRC examined quarterly investment returns and net mutual fund sales figures from 1990 to 1999. On average, $91 billion of new cash flowed into funds after they had experienced their "best performing" quarters. But only $6.5 billion in new money flowed into funds after their "worst performing" quarters. Evidence of performance chasing -- higher net flows into funds after their best-performing quarters -- was identified in 42 out of 48 Morningstar categories studied.

According to Gavin Quill, FRC's Director of Research Studies who oversaw the study, "Our research shows that accelerating redemption rates and declining holding periods are entrenched problems that have been worsening for more than a decade. It will take a concerted effort by financial professionals and individual investors alike to reverse this disturbing trend and to undo its detrimental affects on the long-term financial health of the investing public."

Advisor-Assisted Investors vs. Direct Investors
In order to assess the impact of a financial advisor on investor performance, the study also compared ICI flow data for "wholesale" funds (those sold by an advisor) vs. funds directly marketed to investors from 1996 to 2000. It was observed that so-called "do-it-yourself" investors redeemed their funds more than advisor-assisted investors in every month except one. Redemptions among "do-it-yourself" investors averaged 18% in 1996, rising to 30.5% in 2000. Redemptions among advisor-assisted investors also rose, but to a lesser extent, from 13.8% in 1996 to 25.4% in 2000.

Methodology
FRC evaluated ICI data on net fund flows for every Morningstar investment category, and compared the performance of fund investors to the performance of the funds they moved in and out of during various holding periods from January 1, 1990 through March 31, 2000. More information on FRC's results and the methodology used for Phoenix Investment Partners' Study on Investor Behavior and Its Impact on Long-Term Investment Success is available upon request.

NOTE: Past performance is not indicative of future results. There is no assurance that holding a fund over time or utilizing the services of a financial advisor will increase returns. There are fees associated with financial advisory services, including transactional and asset-based fees. Mutual funds distributed by Phoenix Equity Planning Corporation, Member NASD, and subsidiary of Phoenix Investment Partners, Ltd. For more complete information about Phoenix mutual funds, including charges and expenses, please call your financial advisor or contact us at 800-243-4361. Read the prospectus carefully before you invest or send money.

Phoenix Investment Partners, Ltd. is a leading U.S. investment management company providing individuals and institutions with access to eight boutique money managers and a full range of distinct investment disciplines and money management services. It is one of the Phoenix companies, a premier provider of wealth management services, with corporate offices in Hartford, Conn. As of December 31, 2000, Phoenix Investment Partners had $56.6 billion in assets under management. For more information on Phoenix Investment Partners, visit www.phoenixinvestments.com.

Financial Research Corporation is a financial services consulting firm in Boston, specializing in competitive intelligence and analytical services to assist strategic planners and marketing professionals develop and implement innovative financial products and services. For more information, visit the FRC Web site at www.frcnet.com.

⁽¹⁾ Flows in and out of mutual funds were used to determine actual investor average returns provided by long-term mutual funds in each Morningstar investment category during the 1990s. Subsequent three-year return figures were totaled and averaged to produce an unweighted category return for the holding period. These unweighted figures, called fund returns, can be viewed as a proxy for an investor who had dollar-cost averaged with a fund. Figures for the actual net flows into funds (new investor deposits minus investor redemptions) throughout the period were weighted. These flow-weighted returns are a general proxy for the returns the average individual investor received.

⁽²⁾ A mutual fund investor's annual redemption rate is defined as the total dollars redeemed from a mutual fund in a given year as a percent of an investor's starting assets in that fund.

Return To Top