Actively invested target date funds’ performance lagged behind index benchmarks for almost all target date categories in 2010, according to new Standard & Poor’s research.
The inaugural S&P Indices Target Date Scorecard released March 10 provides benchmark comparisons for nine target dates over one year, three years, and five years. For 2010, 2,040 target date funds fared comparatively worst as 77.5 percent got outperformed by the S&P Target Date 2040 Index, while 2010 target date funds did best with 53.33 percent of funds outperformed by the S&P Target Date 2010 Index.
Over three years, 2,020 funds saw the weakest comparative results as 93.1 percent lagged the index, while retirement-income funds had the best outcomes, with just 39.13 percent outperformed by the benchmark. Over five years, outperformance by the benchmark ranged from a high-end tie of 87.5 percent between 2020 and 2030 funds, to 57.14 percent for target date funds dated
2045 or later.
“The Scorecard’s results are showing that target date funds, being a multi-asset-class portfolio, are having a hard time keeping up with benchmarks,” says Phil Murphy, S&P Indices vice president of defined contribution.
Further-dated funds lagged index benchmarks more often, he says. “The glide paths tend to be more similar: Most funds have equity allocations of 85 percent to 90 percent,” he says. “The closer-dated funds in general did a little better. I think it has to do with that divergence [in glide paths], and it is also sample-period dependent.” The recent equity rally means that “through” target date funds with a lifetime glide path and holding higher equity allocations at retirement did relatively better in 2010 than “to” target date funds intended to end at retirement. Because of the wider divergence in glide paths, he says, “You can have wide swings in near-dated funds relative to the benchmark, more so than further-dated funds.”
Many of the near-dated funds hold too much equity and take too much risk, believes Joseph Nagengast, a principal at Target Date Analytics LLC. “It is nice to see that investors in 2010, 2015, and 2020 funds are getting some reward for all the risk they are taking,” he says.
“Most fund managers put too much focus on growth, and ignore the preservation of capital as people near the target date,” Nagengast says. “All of this talk about longevity risk is bunk. Eighty percent of participants take all their money out within a couple of years of their target date.”
Asset-weighted average returns generally exceeded equal-weighted returns in each peer group, S&P found, indicating that larger target date funds performed better than smaller ones relative to the index in 2010. Fidelity Investments, T. Rowe Price, and Vanguard dominate the target date fund market “by a mile,” Nagengast says, with more than 80% of the assets between them.
But the bigger versus smaller result will depend on the time period, Murphy says, since holdings of underlying asset classes vary among providers. “There is nothing inherently advantageous to the larger funds, other than perhaps economies of scale,” he says. “But there is no inherent investment advantage.”
