The Quantitative Analysis of Investors Behavior report from DALBAR suggests that retention rates in such funds are substantially longer than in either equity or fixed income funds because of rebalancing. The average retention rate for asset allocation funds has been rising in the past five years, with a 5.3 year average retention rate seen in 2004.
“Asset allocation funds have created a comfort zone for investors that protects them from their own errors,” the report concluded, predicting that the trend will continue into 2005. Although these funds are “severely underperforming equities,” the report notes that they improved investor behavior and prevented “significant losses for investors.”
This doesn’t mean that retention rates for equities were low. Equity fund investors retention rates exceeded four years for the first time in 2004, a trend that DALBAR applauded as good investor behavior. Fixed-income fund retention rates were also up, with an average of 3.2 years in 2003, compared to 2.6 years in 2003.
The report also noted that in 2004, equity investors beat the S&P 500 for the first time ever, a result of pouring in billions and holding onto their investments. The first nine months of the year – in which performance was stagnant – did not drive investors out of the market, and they were rewarded handsomely when the market surged in the fourth quarter, the report noted.
However, the average equity investor’s returns are still 9% below the S&P 500 for a 20-year period, the report said. Recent behavior, however, has brought this margin down.
The DALBAR report is available by calling 617-723-6400 or at QAIB@Dalbar.com .