Research from Rainmaker Information has found that investors could potentially make more money investing in managed investment products in net outflows over chasing returns in popular funds.
According to its latest RMetrics Equities Report, the money-weighted rate of return for managed investment products in outflow was higher on a per-dollar basis, making it more cost-efficient to invest in these products.
As part of the research, it compared returns achieved by international equities products calculated using the time-weighted rate of return method (the de facto standard used to assess investment manager performance, skill and underlying portfolio risk, which ignores any impact of net flows) and the money-weighted rate of return method (how much portfolios returned after taking into account the timing and size of deposits and withdrawals into and out of the investment portfolio).
Rainmaker then compared these returns under conditions of positive fund flows, negative fund flows and all fund flows over the three-year period to December 2022.
It found that, under the condition of net positive fund flows, the time-weighted rate of return was 5.5 per cent per annum versus a money-rated rate of return of 3.1 per cent per annum.
Under the condition of net negative fund flows, the money-weighted rate of return was higher than the time-weighted rate of return, at 5.6 per cent per annum versus 5.2 per cent per annum, respectively.
“Investors often think that a fund in net outflows is a red flag, indicating that other investors are bailing out and that they should follow them,” observed John Dyall, head of investment research at Rainmaker.
“But this may not always be the case. In fact, investing in managed investment products that are in net outflows may be a smart investment strategy, or at least smarter than chasing returns in the popular funds.”
Rainmaker’s report suggested that the investment styles followed by any international equities managed fund would have periods when it outperformed or underperformed other styles, but investors jumped on board following strong performance “just when the party is starting to end,” Dyall added.
“Investing is not a popularity contest, or at least it shouldn’t be. When you look at the net flow numbers and then at the actual performance achieved by real investors, it appears many investors and their advisers have yet to get the message,” he said.
In light of the research, he also stressed the importance of due diligence and consulting a professional before making investment decisions.
