Investors are supposed to get more conservative over time, and fund investors seem to have grown up a lot in recent years.
It’s not that they are all turning toward safer funds, it’s just that they seem to have given up performance surfing, the dangerous habit of always trying to own the funds that top the short-term performance charts.
Indeed, talk to many industry watchers and they will tell you that the media’s practice of publishing big quarterly fund reviews is a bit anachronistic, a throwback to a time when investors had a different mindset.
Chart surfing was, for years, a favorite sport of fund investors, who basically banked on catching a hot fund and riding for as long as it stayed warm. It wasn’t necessarily as organized as making trades after the release of the quarterly performance results, but it amounted to “get it while it’s hot, dump it when it’s cold in favor of the next hot item.”
It’s also a strategy that tends to have investors buying high – after they have recognized, but missed out on a run of good performance – and selling low, when the fund has cooled off. Indeed, that’s what happened to many investors during the bear market that started in 2000; having loaded up on Internet or technology funds, investors surfed the charts until they crashed on the rocks.
The proof that investors have stopped surfing in mutual funds comes from a combination of statistics and common-sense analysis of industry trends, but it’s good news for buy-and-hold investors everywhere, as the surfers’ trading style typically raised costs for the stay-put shareholders.
So let’s start with the numbers.
The pace of redemptions in mutual funds is at its lowest rate in 20 years, according to Strategic Insight, an independent industry research firm. Avi Nachmany said at the Investment Management Consultants Association conference in Chicago last week that fund investors have become complacent when it comes to riding along with their funds. Investors, he noted, are like a “pod of whales” moving gently forward together.
There are reasons why investors seem happier staying put in their funds than moving in and out. For starters, the data has gotten better looking as fund firms ended the rapid-trading that led to scandals several years ago; that activity has now stopped, and the numbers reflect it.
The redemption figures also illustrate the growing popularity in exchange-traded funds, particularly as a vehicle for sector investors who try to ride one wave in the business cycle right to the next. For someone who wants to trade a lot, a mutual fund typically isn’t a great vehicle for getting the job done; by comparison, ETFs are built for trading (although they also can work for the buy-and-holder).
Morningstar analysts frequently acknowledge that the top performing funds have earned good star ratings, but they still warn investors away from them. And now it seems like investors are singing from the same hymnal.
“We have seen some areas – like energy and real estate – where investors saw the funds get hot and went in that direction, but that may have been more about owning a popular, established asset class than about buying the hottest fund right now,” says Laura Lutton, senior fund analyst at Morningstar.
“I think people learned their lesson from rushing into tech funds. Now they know that they don’t need the funds that can put up the best numbers in any one quarter or year.”
The bear market also convinced record numbers of investors to seek out advice and counsel, and the financial planners of the world are much more concerned about asset allocation than about picking the right fund to own now.
