Investors in U.S. Equity Funds Earned 8.32% a Year Over the Past Decade

This compares to 8.93% for the average fund, making a shortfall of 0.61 percentage points, Morningstar says.

Because of poor timing in purchasing and redeeming funds, investors tend to earn less than what the fund returns, Morningstar notes in white paper “Mind the Gap 2018.”

“Investors large and small tend to sell after downturns only to buy back after a rally,” the research firm says. “But remaining invested in target-date funds [TDFs] and benevolent market conditions have narrowed that gap.”

For instance, the typical investor in diversified domestic equity funds earned an 8.32% annualized return for the 10 years ended March 31. By comparison, the average diversified domestic equity delivered an average 8.93% return, making for a shortfall of 0.61 percentage points.

Balanced funds, which include TDFs, saw a positive gap of 0.30 percentage points, with the average investors enjoying a 5.93% annualized return. The gap for municipal bond funds shrank slightly to a 1.26-percentage point annualized shortfall based on investor returns of 2.23%.

In other classes, the gap worsened. The gap between international equity funds grew to 105 basis points (bps), with total investor returns of 2.95%. The gap in taxable bond funds grew to 87 basis points with an annualized investor return of 3.01%.

Alternatives show the worst investor returns but the best investor-returns gap. The investor return is a dismal 9 basis points for the 10 years, but the gap is a positive 140 basis points.

In the aggregate, the average investor trailed the average fund by 26 basis points annualized over the past 10 years; the investor return for the period was 5.53% a year compared to 5.79% for the average fund.

The five-year investor return gap figures are significantly better than the 10-year numbers, with one notable exception: Alternative funds saw their gap flip into negative territory with a 46-basis-point gap on investor returns of 1.21% a year.

“Target-date funds have proved remarkably consistent at producing good results for investors,” Morningstar says. “[When] investors commit to consistent investment regimes, investor returns are strong and the gaps are often positive. We think that the tremendous diversification of target-date funds, combined with the steady investment of 401(k) plans, shows the fund industry at its best.”

The “Mind the Gap 2018” white paper can be downloaded here.