Fund Spy

Have Investors Stopped Chasing Returns?

Kevin McDevitt, CFA

During the late-1990s tech-fueled boom, one of the laws of the asset management industry was that money followed returns. Back then, a new fund--especially one with "technology" in its name--could count on massive inflows after just one or two big years. This was in keeping with the belief that retail mutual fund investors were the "dumb" money and they could be counted on to behave like lemmings.

It appears that fund investors have become less inclined to chase performance in the two decades since, as strong returns within a given category no longer mean retail money will follow. For example, among U.S. equity funds (including both open-end and exchange-traded funds), the large-growth Morningstar Category has by far the best returns over the past five years through late November 2018, with a 10.6% average annualized return. Yet large-growth funds had by far the greatest outflows of any U.S. equity category. Investors pulled an astonishing $241 billion from large-growth funds through October 2018, far more than the other eight domestic categories combined.

Kevin McDevitt, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.