Investor behaviour impacted thematic portfolio returns

18 November 2023

Investors’ poor judgement in timing the market has negatively impacted returns across thematic funds, according to Morningstar.

Demand for thematic funds has soared in the wake of the pandemic, with this distinct grouping of funds, which attempt to harness one or more secular growth themes, having more than doubled its assets under management globally since 2018.

However, the combination of volatile return profiles, low-or no-commission trading and intraday trading capabilities in thematic ETFS can encourage the “worst type” of investor behaviour and result in poor investment outcomes.

According to Morningstar’s new research ‘The Big Shortfall’, investors in thematic funds lost more than two thirds of total returns due to poorly timed buys and sells. While thematic funds’ average total return was 7.3% annualised over the five-year period to 30 June 2023, investors only earned a 2.4% return when the impact of cash inflows and outflows is considered.

Kenneth Lamont, senior manager research analyst at Morningstar, said: “As a global cohort, thematic funds have yielded disappointing investor returns over the past five years, with a staggering 4.9% investment gap. Unfortunately, the narrative is one of poor timing, as over two-thirds of total returns slipped away.”

Morningstar’s findings showed that investors lost more value in focused funds such as those tracking technology or physical world broad themes, compared with more diversified broad thematic peers. Return gaps were far wider in exchange-traded funds than in thematic mutual funds, with ETFs tending to offer more concentrated bets.

The largest return shortfalls occur across highly targeted funds, the group said, which attracted large net inflows before suffering a downturn.

Lamont added: “Investors, collectively, have shown themselves to be poor market-timers, especially when buying and selling more targeted volatile funds compared to their more diversified counterparts.

“Our research advocates for a more patient and disciplined buy-and-hold strategy when it comes to thematics, emphasising that this approach is likely to deliver superior investment outcomes for most.”

Professional Paraplanner