Target date funds and benevolent market conditions have improved investors’ money-weighted returns, according to new research from Morningstar.
At its 30th annual investment conference in Chicago, Morningstar released the results of 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 that 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% per year over the decade ended March 31. This is the narrowest gap recorded since the first issue of this study in 2005.
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, with the average investor enjoying a 5.93% annualized return.
This improvement reflects the continued strength of target date funds, both in terms of investor behavior and strong gains among well-diversified funds, according to the research.
“You can see very clearly that the target date funds are working for investors better than anything else,” Russel Kinnel, chair of Morningstar’s North America ratings committee and editor of Morningstar FundInvestor, said at a press briefing during the conference.
Target date funds, which are collectively the largest and fastest-growing subset of balanced funds, have proved remarkably consistent at producing good results for investors. As the research states, target date funds are easy for investors to use because performance swings are muted, and most investors buy in through 401(k) retirement plans with automated savings processes, which creates a disciplined track of continued savings.
Morningstar also notes that in the U.S. and in other countries where investors commit to consistent investment regimes, investor returns are strong and the gaps are often positive.