Look back to study future of target-based funds
  • Wednesday, November 14, 2018
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Look back to study future of target-based funds

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If you have been thinking about how to make investing easier on yourself or your employees, check out target-date funds, a subject we’ve been discussing the past two weeks. This column is about data that will help you understand how funds perform.

Using the SteeleSystems.com database, I found more than 600 target-date offerings (representing a single share class), from target dates of 2000 through 2060-plus.

The first thing I wanted to explore is how these funds performed during a financial crisis. I screened for funds in existence during the last down-market cycle, October 2007 through February 2009. Of the 174 funds, about 60 percent declined over 40 percent, and a third of those fell as much or more than the S&P 500 (minus 50 percent). Experiencing that kind of volatility can’t be comforting in retirement.

Of the remaining funds, 19 lost less than 30 percent during the down-market cycle. Only six lost less than 20 percent.

In the up market that followed, the fund that lost the least made the least (up 47 percent), while some of the biggest losers during the downturn recovered handily (up over 200 percent).

If you take in the full cycle from October 2007 through May 2018, the least volatile funds had the lowest returns (33 percent to 46 percent, with two exceptions that returned 64 percent and 71 percent). The highest performer returned 100 percent for the full market cycle after declining 45 percent during the down market. For context, the S&P 500 returned about 121 percent for the full cycle, declining 50 percent during the down market.

Then I wanted to see if target- date fund returns varied over shorter periods during the current bull market. I expected longer- horizon funds would return more, and indeed that was the case.

I looked at a more recent period (the past 10 years), using 210 funds. The best performer (a 2050 target-date fund) returned 107 percent for the period (7.6 percent annualized). The worst performer (a 2010 target-date fund) returned 31 percent (2.7 percent annualized).

For a shorter period (five years), I found 362 funds. The best performing (a 2055 target-date fund) achieved a 66.4 percent return (10.7 percent annualized). The worst performer (a 2010 target- date fund) returned only 10 percent (1.9 percent annualized).

The lower returns reflected lower equity allocations in funds with shorter horizons. For example, a fund that is 40 years from its target date may have 100 percent invested in stocks. The same fund may have 50 percent at the target date and 20 percent 10 years later.

That’s just a look at performance, which gives me an idea of past outcomes. A lot more is involved, of course. A good resource is Morningstar’s 61-page research report called “2018 Target-Date Fund Landscape: Sizing Up the Trillion-Dollar, Increasingly Passive Giant.” It is available at 808ne.ws/passivegiant.

Jeff Holt and Heather Larsen, authors of the report, say: “Target- date funds’ distinguishing feature is their shifting asset allocation as an investor approaches retirement. Looking at a target-date series strategic equity glide path, which indicates the anticipated equity stake at different points before and after the target retirement date, is the simplest way to follow the shifts.”

Are target-date funds the answer for all investors or all 401(k) plans? Hardly. But they are worth a look if you want to automate investing over a longer horizon.


Julie Jason is a personal money manager at Jackson, Grant of Stamford, Conn., and an award-winning author. Contact her at readers@juliejason.com.


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