In addition, municipal-bond funds are typically sold based on their yields. Higher-yielding funds that buy riskier bonds may get hit harder in an economic downturn, Kinnel said.
Morningstar’s annual study, titled “Mind the Gap," measures the performance of the average dollar invested in a fund and estimates the impact investor behavior had on investment outcomes.
To calculate fund investor returns, Morningstar adjusts official returns by using monthly flows in and out of a fund and asset-weights the returns to get an average for an asset group. In all asset classes overall, the average open-end investor lagged behind the average fund by 0.26 percent.
“The basic idea is we know people aren’t necessarily there for the whole five or 10 year period," Kinnel said. “They move in and out and want to take a look at how that timing works."
To be sure, the goal for investors is to get a good return in absolute terms. They likely don’t look at the gap between their own returns and those of the funds in which they invest.
“I could have a small gap on a really bad fund," Kinnel said.
This article was provided by Bloomberg News.