Today’s investors benefit from portfolios with better balance, according to Morningstar.

Though they lack the growth potential of more concentrated strategies, the average investor in balanced funds like target-date and asset-allocation strategies outperformed open-ended fund investors as a whole, according to Morningstar’s 2018 “Mind the Gap” study.

While the average dollar invested in an open-ended fund achieved a 5.5 percent average annual return over the decade ending March 31, 2018, the average dollar in balanced funds gained 5.9 percent a year.

“People have benefitted through consistently investing through paycheck contributions into target-date funds,” said Jeff Holt, director of multi-asset strategies at Chicago-based Morningstar. Holt spoke at a panel discussion, “On the Cutting Edge of Retirement Research,” during the 2018 Morningstar Investment Conference on Tuesday.

“These investors tend to stay the course," he said. "It appears that target-date funds are doing a good job of keeping investors in their seats.” 

Investors in balanced funds experienced a superior “behavior gap,” the difference between a fund’s dollar-weighted and time-weighted returns, which reflects how opportunely investors are timing their investments.

While time-weighted returns only focus on changes in the value of a fund’s assets, dollar-weighted returns incorporate the impact of cash inflows and outflows from investors’ purchases and sales using the same methodology advisors use to calculate an investment’s internal rate of return.

The average dollar invested in open-end funds gained 5.5 percent annually in the decade ending March 31, while the average fund returned 5.8 percent, a 30-basis point negative behavior gap. Morningstar noted that this was the smallest measured behavior gap in the 13 years it has run the study.

However, investors in balanced funds experienced a 30-basis point positive behavior gap in the same period; the average dollar in balanced funds gained 5.9 percent while the average fund gained 5.6 percent.

Panelist Aron Szapiro, Morningstar’s director of policy research, said that the adoption of target-date strategies as qualified default alternatives in workplace retirement plan obfuscates the meaning of the positive behavior gap.

“It’s hard to disaggregate to what extent it’s the TDFs themselves and to what extent it’s connected to auto-enrollement,” he said.

Morningstar’s study appears to confirm the folly of timing investments over the past decade. Morningstar uses a third metric, an asset-weighted total return, to measure how the average investor fared in their mutual fund investments while taking into account decisions to enter and exit funds at certain times.

Market timing is still hurting investor performance, according to Morningstar. In the decade ending on March 31, the average open-ended fund posted a 6.9 percent annualized asset-weighted total return, creating a 1.4 percent gap over the 5.5 percent return enjoyed by investors.

Since Morningstar’s last “Mind the Gap” study in December 2016, the behavior gap has narrowed in some fund categories like domestic equities and municipal bonds. In others, like taxable bonds and international equities, the gap has widened.

Alternatives funds posted the worst dollar-weighted returns over the 10-year study period at a paltry nine basis points annually, but when time-weighted returns were taken into account, alternatives posted a 1.3 percent annual loss—meaning alternatives fund investors were able to create a positive behavior gap despite the poor performance of their asset class.

Morningstar’s data set included all U.S. open-end mutual funds that hold individual securities, excluding ETFs and fund-of-funds.