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.