An article in CityWireUSA quotes the maxim “the more volatile the asset class, the worse the investor behavior,” and examines the active funds in Morningstar’s Small Growth category to back it up. In the 143 active funds in the category, the return on the average dollar invested has trailed behind the performance of those funds by 2.44% annualized over the last 3 years. Meanwhile, the average fund has seen a return of 16.34% over the same 3 years with the average investor gaining a 13.9% return.
Why the disparity? It’s likely that the Russell 2000 Growth index returns of 28% in 2019 and then 34% in 2020 garnered investor interest and they scrambled to get in. But in 2021, that index trailed the S&P 500 by more than 20%, with a paltry return of 2.5% compared to the 26.89% of the broader market. And so far this year, the small-cap growth index is down 14%. As a result, investors in both good funds and the riskier funds have been stuck with poor returns, the article maintains.
The fund posting the worst return for the 3-year January 2019-January 2022 period is American Growth Cannabis, with a -26.5% annualized return against the fund’s -14.68% return. However, the fund is tiny—only $333,000—and so only a small amount of investors have been burned. But the mainstream $928 million Morgan Stanley Inst. Inception Fund, while posting a 31.43% return for the same period, earned a -20.29% for their investors for the same 3-year period—a disparity of more than 50% that was the widest in the category. It’s the same story: a huge return of 150.57% in 2020 brought investors pouring in, but then 2021 saw a negative return of -3.33% as the disruptive companies that the fund favors in tech, healthcare, communications, and consumer cyclicals plummeted, the article notes.
There were some small-cap growth investors who made out okay, notably Vanguard, whose $22 billion Vanguard Explorer fund saw an annualized return of 17.33% for the period with an investor return of 16.83%. And investors in the $107 million Fuller & Thaler Behavioral Small-Cap Growth fund actually did better than the fund itself; they earned a 34.48% return, outperforming the fund by almost 14%.