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Morningstar’s Annual “Mind the Gap” Study Shows Better Timing and Market Conditions Led to Solid Investor Returns

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Morningstar's Annual "Mind the Gap" Study Shows Better Timing and Market Conditions Led to Solid Investor Returns

At its 30th annual investment conference in Chicago, Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today published its annual study of investor returns, “Mind the Gap,” which measures the performance of the average dollar invested in a fund and estimates the impact investor behavior had on investment outcomes. Overall, the study shows that the gap between U.S. open-end funds’ reported total returns and the returns experienced by investors narrowed to 0.26 percent per year over the decade ended March 31, 2018.

The “Mind the Gap” study leverages the proprietary Morningstar® Investor Returns™ data point, which estimates a fund’s dollar-weighted return by incorporating the effect of cash inflows and outflows from investors’ purchases and sales, as well as the change in a fund’s assets.

The “gap” refers to the difference between funds’ dollar-weighted and time-weighted returns, reflecting how opportunely investors timed their investments.

“Investors tend to buy high or sell low when markets are volatile, potentially missing out on a fund’s gain. However, with the last bear market far in the rear-view mirror, investors’ steady investment contributions over the last 10 years appear to have paid off,” said Russel Kinnel, chair of Morningstar’s North America ratings committee and editor of Morningstar® FundInvestorSM. “Similar to last year’s Mind the Gap study, we found that investors have largely succeeded in using balanced funds, such as target-date funds, where the behavior gap was narrow. On the flipside, investors fared poorly with alternative funds, which had the worst dollar-weighted returns, reflecting the funds’ generally lousy performance.”

Key highlights of the study include:

The average dollar invested in open-end funds gained 5.5 percent per year over the 10 years ended March 31, 2018, while the average fund returned 5.9 percent. This is the narrowest gap recorded since the first issue of this study in 2005.

In comparing the 5.5 percent per year dollar-weighted return against the 6.9 percent annualized asset-weighted average return of all funds, the gap grows to 1.4 percent per year for all funds over the 10 years ended March 31, 2018.

The gap narrowed for the typical investor in diversified domestic-equity funds; they earned an 8.3 percent dollar-weighted annualized return for the 10 years ended March 31, 2018. Compared with the average fund’s 8.9 percent annual reported return, the 0.61 percent per year shortfall is a modest improvement over the previous report, which ran through December 2016.

Balanced funds—which include allocation funds, target-date funds, and traditional balanced funds—saw a positive gap of 0.30 percentage points annually for the decade ended March 31, 2018, with the average dollar gaining 5.9 percent per year. This improvement reflects the continued strength of target-date funds, both in terms of investor behavior and strong gains among well-diversified funds.

While the gap for municipal-bond funds shrank to 1.3 percentage points per year, it still represents more than a third of the returns the average fund earned over this span, reflecting the impact of media headlines such as the Puerto Rico debt crisis.

The gap widened in some asset classes, including international equity and taxable bond. Regional funds dedicated to European and Asian stocks saw wide behavior gaps, as did funds in the Foreign Large Growth category, suggesting investors struggled to use these investments successfully.

Alternatives funds had the worst dollar-weighted returns, a dismal nine basis points annually over 10 years. Remarkably, this was still nearly 140 positive basis points per year better than the average alternative fund’s 1.3 percent reported annual loss.

The five-year investor return gaps are generally much narrower than the 10-year numbers. In fact, the average dollar invested in U.S. open-end funds returned 7.0 percent per year, outgaining the average fund which earned 6.6 percent annually.

It’s important to note that estimates of the behavior gap can be sensitive to the inputs. For instance, if comparing funds’ aggregate dollar-weighted returns to their asset-weighted—instead of equal-weighted—average total returns, the calculation can yield a materially different estimate of the behavior gap. Given this, the behavior gap should be viewed as a range of potential shortfall or surplus investors experienced with their fund investments in aggregate over a given time period.

The “Mind the Gap” study is available here and an article summarizing the findings is available on Morningstar.com® here. The U.S. investor returns study is available in the June 2018 issue of Morningstar FundInvestor.

Morningstar has approximately 120 manager research analysts worldwide who cover approximately 4,500 funds. The company provides data on approximately 233,200 open-end mutual funds, 11,100 closed-end funds, and 15,000 exchange-traded product listings as of March 31, 2018.

About Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, retirement plan providers and sponsors, and institutional investors in the private capital markets. Morningstar provides data and research insights on a wide range of investment offerings, including managed investment products, publicly listed companies, private capital markets, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $201 billion in assets under advisement and management as of March 31, 2018. The company has operations in 27 countries.

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Sunak to use budget to expand apprenticeships in England

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Sunak to use budget to expand apprenticeships in England 1

LONDON (Reuters) – British finance minister Rishi Sunak will announce more funding for apprenticeships in England when he unveils his budget next week, the government said on Friday.

Employers taking part in the Apprenticeship Initiative Scheme will from April 1 receive 3,000 pounds ($4,179) for each apprentice hired, regardless of age – an increase on current grants of between 1,500 and 2,000 pounds depending on age.

The scheme will extended by six months until the end of September, the finance ministry said.

Sunak will also announce an extra 126 million pounds for traineeships for up to 43,000 placements.

Sunak’s March 3 budget will likely include a new round of spending to prop up the economy during what he hopes will be the last phase of lockdown, but he will also probably signal tax rises ahead to plug the huge hole in the public finances.

Sunak is also expected to announce a “flexi-job” apprenticeship scheme, whereby apprentices can join an agency and work for multiple employers in one sector, the finance ministry said.

“We know there’s more to do and it’s vital this continues throughout the next stage of our recovery, which is why I’m boosting support for these programmes, helping jobseekers and employers alike,” Sunak said in a statement.

(Reporting by Andy Bruce, editing by David Milliken)

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UK seeks G7 consensus on digital competition after Facebook blackout

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UK seeks G7 consensus on digital competition after Facebook blackout 2

LONDON (Reuters) – Britain is seeking to build a consensus among G7 nations on how to stop large technology companies exploiting their dominance, warning that there can be no repeat of Facebook’s one-week media blackout in Australia.

Facebook’s row with the Australian government over payment for local news, although now resolved, has increased international focus on the power wielded by tech corporations.

“We will hold these companies to account and bridge the gap between what they say they do and what happens in practice,” Britain’s digital minister Oliver Dowden said on Friday.

“We will prevent these firms from exploiting their dominance to the detriment of people and the businesses that rely on them.”

Dowden said recent events had strengthened his view that digital markets did not currently function properly.

He spoke after a meeting with Facebook’s Vice-President for Global Affairs, Nick Clegg, a former British deputy prime minister.

“I put these concerns to Facebook and set out our interest in levelling the playing field to enable proper commercial relationships to be formed. We must avoid such nuclear options being taken again,” Dowden said in a statement.

Facebook said in a statement that the call had been constructive, and that it had already struck commercial deals with most major publishers in Britain.

“Nick strongly agreed with the Secretary of State’s (Dowden’s) assertion that the government’s general preference is for companies to enter freely into proper commercial relationships with each other,” a Facebook spokesman said.

Britain will host a meeting of G7 leaders in June.

It is seeking to build consensus there for coordinated action toward “promoting competitive, innovative digital markets while protecting the free speech and journalism that underpin our democracy and precious liberties,” Dowden said.

The G7 comprises the United States, Japan, Britain, Germany, France, Italy and Canada, but Australia has also been invited.

Britain is working on a new competition regime aimed at giving consumers more control over their data, and introducing legislation that could regulate social media platforms to prevent the spread of illegal or extremist content and bullying.

(Reporting by William James; Editing by Gareth Jones and John Stonestreet)

 

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Britain to offer fast-track visas to bolster fintechs after Brexit

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Britain to offer fast-track visas to bolster fintechs after Brexit 3

By Huw Jones

LONDON (Reuters) – Britain said on Friday it would offer a fast-track visa scheme for jobs at high-growth companies after a government-backed review warned that financial technology firms will struggle with Brexit and tougher competition for global talent.

Finance minister Rishi Sunak said that now Britain has left the European Union, it wants to make sure its immigration system helps businesses attract the best hires.

“This new fast-track scale-up stream will make it easier for fintech firms to recruit innovators and job creators, who will help them grow,” Sunak said in a statement.

Over 40% of fintech staff in Britain come from overseas, and the new visa scheme, open to migrants with job offers at high-growth firms that are scaling up, will start in March 2022.

Brexit cut fintechs’ access to the EU single market and made it far harder to employ staff from the bloc, leaving Britain less attractive for the industry.

The review published on Friday and headed by Ron Kalifa, former CEO of payments fintech Worldpay, set out a “strategy and delivery model” that also includes a new 1 billion pound ($1.39 billion) start-up fund.

“It’s about underpinning financial services and our place in the world, and bringing innovation into mainstream banking,” Kalifa told Reuters.

Britain has a 10% share of the global fintech market, generating 11 billion pounds ($15.6 billion) in revenue.

The review said Brexit, heavy investment in fintech by Australia, Canada and Singapore, and the need to be nimbler as COVID-19 accelerates digitalisation of finance, all mean the sector’s future in Britain is not assured.

It also recommends more flexible listing rules for fintechs to catch up with New York.

“We recognise the need to make the UK attractive a more attractive location for IPOs,” said Britain’s financial services minister John Glen, adding that a separate review on listings rules would be published shortly.

“Those findings, along with Ron’s report today, should provide an excellent evidence base for further reform.”

SCALING UP

Britain pioneered “sandboxes” to allow fintechs to test products on real consumers under supervision, and the review says regulators should move to the next stage and set up “scale-boxes” to help fintechs navigate red tape to grow.

“It’s a question of knowing who to call when there’s a problem,” said Kay Swinburne, vice chair of financial services at consultants KPMG and a contributor to the review.

A UK fintech wanting to serve EU clients would have to open a hub in the bloc, an expensive undertaking for a start-up.

“Leaving the EU and access to the single market going away is a big deal, so the UK has to do something significant to make fintechs stay here,” Swinburne said.

The review seeks to join the dots on fintech policy across government departments and regulators, and marshal private sector efforts under a new Centre for Finance, Innovation and Technology (CFIT).

“There is no framework but bits of individual policies, and nowhere does it come together,” said Rachel Kent, a lawyer at Hogan Lovells and contributor to the review.

($1 = 0.7064 pounds)

(Reporting by Huw Jones; editing by Jane Merriman and John Stonestreet)

 

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