John Rekenthaler, vice president of research at Morningstar, tries to debunk the myth that mutual fund investors are dumb. Far from it, he says. They choose good funds, but time the market poorly.

Rekenthaler takes on the view that that mutual fund investors are the "dumb bunnies" of the investment industry, so bad at selecting funds that they would be far better off buying index-only funds.

Rekenthaler says the proof that investors are good at fund selection is the comparison between asset-weighted funds against equal-weighted funds in the same category in a given year.

Based on a test he conducted focusing on the past 10 calendar years, the asset-weighted funds win comfortably. He found that the funds that the most money flowed into outperformed the indices.
This shouldn't be a surprise, he writes. As is well known, most new investors flock to 4- and 5-star funds, which typically have low fees and good performance.

The problem, according to Rekenthaler, is that fund investors time the market poorly, and they chase category performance. The latter is "a big and universal problem that nobody adequately addresses--not Morningstar, not financial advisors, not the fund industry, not ETF providers, not the academic community, and not institutional investors." 

Edited by: HFD


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