Fund Spy

Investors Reap the Gains of Target-Date Funds

Janet Yang, CFA

Morningstar's newly released annual study of the target-date-fund landscape shows the funds to be among the most effectively used investments in the fund industry. Investors' success with target-date funds refracts most brilliantly through the lens of the funds' Morningstar Investor Returns. Those returns take into account cash inflows and outflows to measure an investor's actual experience with a fund. They often differ from--and lag--funds' published total returns because investors tend to mistime their investments, pumping cash into funds after markets rise and pulling money out after they fall. (For the past few years, my colleague Russ Kinnel has looked at this discrepancy in returns across major investment categories in his "Mind the Gap" studies.)

By the end of 2014, more than 10 target-date series had amassed a decade or more of investor-return history, making for an opportune moment to take a closer look at how investors have fared with the funds. The news is good: Target-date funds' annualized asset-weighted investor return during the last 10 years through December 2014 stood at 6.1%, 1.1 percentage points greater than the category's 5.0% gain. In contrast, as shown in Exhibit 1, most broad investment categories, such as U.S. equity, international equity, and taxable bond, had negative investor-return gaps.

Janet Yang, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.