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Morningstar Study Finds Investors Overreact to Fund Management Changes

A study conducted by Morningstar found that a “behavioral problem” exists among investors in that they react strongly to fund management changes even though most management changes “result in business as usual at the fund.”  Morningstar noted that it sees no need to downgrade a fund every time there is a management change if it feels confident in the parent, the fund’s process, and the cost. But investors feel differently. Some key takeaways from the study:

  • Morningstar found no relationship between any type of management changes and future performance returns over the next month up to the next three years.
  • Investors’ overreaction to fund-management changes can strengthen over time, persisting up to 36 months after the event.
  • Investors penalize funds with management changes by withdrawing money even though there is no change in fund performance, and the average fund will experience outflows resulting in lower category percentile growth rates over sustained periods.
  • The highest-performing funds are given the benefit of the doubt, and investors may think twice before withdrawing money from such funds.
  • While larger funds are no less likely to perform differently than their smaller peers, investors penalize larger funds more by withdrawing money from the fund at faster rates than small funds.
  • Fund manager industry experience has no effect on either returns or growth.