Masters in Business At The Money: Don’t Underperform Your Own Investments!
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Oct 15, 2025 In this insightful discussion, Jeffrey Patak, a managing director at Morningstar and expert in fund performance analysis, sheds light on the 'Mind the Gap' study. He explains the significant difference between the returns of investment funds and what investors actually experience, revealing a 1.2% annual gap. Jeffrey delves into behavioral finance, identifying how chasing winners and poorly timed trades can hinder returns. He also offers practical tips to minimize this gap, emphasizing the importance of automation, diversification, and sticking to a long-term plan.
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Investor Return Gap Defined
- The investor return gap is the difference between a fund's stated total return and the dollar-weighted return investors actually get.
- Morningstar found a 1.2% annual gap over the trailing 10 years, costing investors about 15% of aggregate returns.
How Morningstar Calculates The Gap
- Morningstar calculates the gap using beginning assets, 120 monthly net flows, and ending assets to derive a dollar-weighted return.
- This reconciles cash flow timing and magnitude with the fund's asset change to estimate investor outcomes.
Time-Weighted Vs Dollar-Weighted Returns
- Time-weighted (total) returns assume a lump-sum buy-and-hold and ignore investor cash flow timing.
- Dollar-weighted returns capture when investors actually buy and sell, which often produces lower realized returns.