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Why Some Funds Succeed and Others Don’t

Morningstar researchers analyzed the historical correlations between both forward risk-adjusted returns and forward cumulative fund flows for more than 57,000 unique funds, evaluating success factors and common pitfalls for newly launched funds.

Nelly Poon 04/08/16

Morningstar recently published a quantitative research report, “The Rise and Fall of New Funds,” which explores the relationship between observed investor preferences for and eventual investor outcomes in newly launched funds. Morningstar researchers analyzed the historical correlations between both forward risk-adjusted returns and forward cumulative fund flows for more than 57,000 unique funds, evaluating success factors and common pitfalls for newly launched funds.

A few key takeaways of the research report include:

  • Frequent portfolio disclosure correlates with higher flows and higher risk-adjusted returns: Portfolio disclosure within the first year can generate an average of 2.7 percent, 7.6 percent, and 9.7 percent increase in category flow percentiles for equity, fixed-income, and allocation categories, respectively.
  • Managers who invest in their funds have historically performed better and garnered more assets: A typical equity fund will have, on average, 5.5 percent higher risk-adjusted returns and will move up its percentile rank for flows within its category by 6.5 percent. For fixed-income and allocation funds, there are 1.9 percent and 4.0 percent increases in risk-adjusted returns, moving up the funds’ percentile rank for flows by 6.9 percent and 8.9 percent, respectively.
  • Female portfolio managers have received higher flows in equity and fixed-income asset classes, but not in allocation.
  • High fees hurt both future flows and future risk-adjusted returns: A category’s most expensive fund could lose out on 3 percent in terms of risk-adjusted returns for equity and allocation funds compared with the cheapest fund.
  • A cannibalization effect exists at firms that launch multiple products at once: When a firm changes practices from launching the most funds in an asset class to launching the least amount, the individual funds gain 16.4, 9.6, and 16.2 percentiles in higher category flows for equity, fixed-income, and allocation asset classes, respectively.

 

 

About Author Nelly Poon

Nelly Poon  

Nelly Poon is an editor with Morningstar.