An Example of How Performance Chasing Damages Wealth

Yesterday’s post explained the difference between time-weighted returns and dollar-weighted returns. If you read between the lines you’ll have noticed that negative excess returns of dollar-weighted returns over time-weighted returns would indicate a proclivity to performance chase by investors. Some interesting data comes from Russel Kinnel who examined both the time-weighted returns and dollar-weighted returns of various mutual fund categories (US data), through April 2005:

 

Dollar-Weighted 10 Year Return

Official 10-Year Return

Difference

Large Value

9.60%

10.02%

-0.40%

Large Blend

7.46%

9.05%

-1.59%

Large Growth

4.35%

7.76%

-3.41%

Mid Value

10.43%

12.16%

-1.73%

Mid Blend

10.59%

11.41%

-0.82%

Mid Growth

6.32%

8.84%

-2.53%

Small Value

11.64%

13.63%

-2.00%

Small Blend

8.95%

11.32%

-2.37%

Small Growth

5.35%

8.41%

-3.06%

Source: Russel Kinnel from Morningstar, Inc. as cited in “The Fundamental Index” by Robert Arnott.
Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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