Criticism leveled at target-date funds over poor 2008 returns of the 2010 target-date funds is shortsighted, according to a Morningstar research report.
“Shortcomings with the 2010 funds shouldn't obscure the bigger success story,” according to Morningstar's “Target Date Series Research Paper; 2010 Industry Survey.”
Morningstar compared annualized total returns of target-date funds with their annualized asset-weighted returns, which take into account monthly inflows and outflows from the funds.
An asset-weighted return “is a better reflection of an investor's experience than the total return,” Laura Lutton, editorial director for Morningstar's fund research group, said in an interview.
When asset-weighted returns are calculated, “investors are doing OK with target-date funds, and may be better than critics have suggested,” Ms. Lutton said. “If the individual sticks with the funds, they'll do pretty well.”
The Morningstar report shows the annualized total return of the 2011-2015 target-date category for the three years ended Dec. 31 was -2.32%, while the annualized asset-weighted return for the same period was -0.9%.
Morningstar found similar results for each of eight other target-date fund categories: For each category, the asset-weighted results were better.
The one exception during this three-year period was the 2000-2010 target-date group. Morningstar said the annualized total return was -0.97% while the asset-weighted return was -1.23%.
The Morningstar report said the asset-weighted returns for most target-date funds buck “the prevailing trend of the fund industry, where investors tend to pull their money at market lows and chase investments past their peaks.”