From the December 2012 issue of Research Magazine • Subscribe!

Q3 Good for Target Funds, Asset Classes

The latest report on fund performance from Morningstar’s Ibbotson Associates shares the results of the third quarter. During the past three months, for instance, target-date, or target-maturity, funds tracked in the group’s research gained 5.1% on average for the quarter. Plus, they’ve improved 18.9% over the past 12 months. During the same period, the S&P 500 rose 6.4% and 30.2%, respectively. 

In addition, flows into these funds have remained strong, with nearly $12 billion flowing into the category during the quarter, says Ibbotson’s report. As of Sept. 30, total assets in target-maturity funds were nearly $466 billion, a 36% increase from a year ago with Fidelity, Vanguard, and T. Rowe Price holding about 75% of total assets.

As for the range of gains for all target-date funds posting gains, those closest to their retirement date improved 1.8% for the third quarter, while equity-heavy funds furthest from retirement ticked up close to 7.7%.

“Still, the number of funds outperforming their respective Morningstar index in the third quarter was low: 39 out of 398 target maturity funds, or roughly 10% of the fund universe outperformed. The index series held up exceptionally well this quarter outperforming more than 90% of retail target date funds,” wrote authors Jeremy Stempien and Cindy Galiano.

Equities across the globe did well in the most recent period, with non-U.S. developed (7%) and emerging-market equities (7.9%) outperforming U.S. equities. U.S. large caps did better than small caps, while value beat out growth. Commodities returned nearly 10% in the quarter, and U.S. REITs showed moderate performance with a 1% return.

“Fixed income performance was more muted than equity returns this quarter,” according to the Ibbotson report. “The higher credit seeking segments of fixed income, such as high-yield bonds, topped the list with a 4.5% increase during the period.”

In the past 12 months, domestic equity outperformed international equity, and U.S. equities had gains of about 30%. Nonetheless, non-U.S. developed and emerging market equities improved 4.3% and 17.3%, respectively. 

The best-performing asset class of the past 12 months: REITs, which gained 33.8%. During the same timeframe, commodities had average returns of 6%.

High-yield bonds posted gains of 19.4% in the past year, while TIPS and U.S. aggregate bonds returned 9.1% and 5.2%, respectively.

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