The average return for target maturity funds last quarter came in 3.5% under the S&P 500 at nearly 9%, but beat the BarCap U.S. Aggregate Bond Index by over 8.5%, according to the Ibbotson Target Maturity Report. The first quarter of 2012 was the highest quarter for TDFs since the third quarter of 2010, the report notes.
The report also noted that the first quarter was the second consecutive quarter when all target maturity funds with at least a one-year history ended the period with a positive return. In general, the funds furthest from retirement had the strongest relative performance as equities significantly outperformed fixed income.
Momentum in equities carried through the first quarter from the end of 2011, the report notes. The S&P 500 rose 12.6% during the first quarter and non-U.S. equities also improved. Low interest rates helped drive investor interest in equities, but hurt performance in the fixed income sector.
In the first quarter, U.S. growth equities were the top returners, followed by value equities. “For the third time over the past four quarters, funds investing in growth outperformed those investing in value which rewarded those target maturity funds with a growth tilt during the quarter,” according to the report.
Real estate returned 10.5%, while commodities returned less than 1%.
Among fixed income assets, high-yield bonds returned 5.3%, while other bonds returned less than 1%.
“These meager fixed income returns are one of the primary reasons that those funds closest to retirement exhibited underperformance relative to those furthest from retirement,” the report notes.
According to the report, returns among asset classes over the past 12 months showed “drastic differences.” In equities, returns ranged from an 8.5% loss to a gain of 11%. The spread in alternatives is even more dramatic, with REITs outperforming all asset classes over the past year at 11.3%, and commodities trailing all other asset classes at a 16.3% loss.