August 10, 2013

Target-Date Funds Post ‘Respectable’ Results: Ibbotson

The 12-month and Q2 performance of these funds, on average, is between that of high-flying equities and weakening bond funds

Target-date funds aren’t keeping up with S&P 500, though they are staying ahead of a key fixed-income benchmark, according to the latest data released by Ibbotson on Wednesday.

“Despite volatile markets, target maturity fund returns for the quarter fell squarely in between equity and bond returns. For the 12-month period ending in June, target maturity funds earned a respectable 11.9%, driven by the strong performance of U.S. equities,” wrote Jeremy Stempien and Cindy Galliano, both directors of investments for Ibbotson (a unit of Morningstar) in the Q2 report.

In the second quarter, target-date funds declined 0.6% on average.

As the experts note, these figures put target-date funds behind the 2.9% Q2 results and 20.6% 12-month returns of the S&P 500; however, they outpaced the Barclays U.S. Aggregate Bond Index, which declined 2.3% in Q2 and 0.7% in the past 12-month period.

Target-date funds with exposure to commodities, Treasury inflation-protected securities and emerging-market equities underperformed other funds in the group over the past year, according to Ibbotson. These assets classes have been “struggling,” with losses of between 7 and 10% in the quarter, the research firm notes.

Fund Flows Moderate

As for fund flows, assets moving into target-date funds in Q2 returned to “normal levels” of $12 billion, after a record-breaking positive flow of $23 billion in the first quarter. At end of the second quarter, total assets in target-date funds totaled an estimated $545 billion, representing a 27% increase from a year ago.

Vanguard and Fidelity earned the top two spots for fund families in terms of asset flows, followed by JP Morgan and T. Rowe Price.

Vanguard, Fidelity and T. Rowe Price – often referred to as the “Big Three” in the target-date field continue to capture about three-quarters of fund flows. Principal, American Funds, TIAA-CREF, Wells Fargo Advantage,JP Morgan and John Hancock each have between 2-4% of market share as of June.

Close to 50% of the target-date assets, or $261 billion, are held in the three categories: 2016-2020, 2021-2025 and 2026-2030.

Volatility Matters

The major asset classes have seen “a wide range of returns over the prior 12 months, ranging from a 25.3% gain in large-value equity, down to an 8.0% loss in commodities,” the analysts point out.

Developed-market equities, excluding the United States, significantly outperformed emerging equities, they add, over the past year. Also, U.S. small-cap and large-cap value equities posted gains of over 23%.

While REITs and emerging-market equities have hurt the performance of target-date funds during the past 12 months, commodities – which have had negative returns for the last three quarters – “have been far and away the worst-performing asset class … ,” the Ibbotson experts say. “The inclusion of commodities over the past year not only detracted value on a relative basis, but also on an absolute basis.”

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