From the December 2013 issue of Research Magazine • Subscribe!

Target-Dates Up 5.3%; But Q3 Flows Weaken

Target-date funds returned 5.3% for the quarter, slightly better than the S&P 500’s 5.2%, according to the latest report issued by Morningstar-owned Ibbotson Associates. Plus, the funds are up “a respectable 12.3% for the 12-month period ending in September, driven by the strong performance of equities in developed countries,” Ibbotson analysts say.

Still, estimated flows into target-date mutual funds were only $1.5 billion for the quarter. This is the lowest figure in more than a decade, explain Jeremy Stempien and Cindy Galiano, who wrote the target-date report. “The transition of some retirement plans from mutual funds to a collective investment trust (CIT) structure may have contributed to the muted flows,” they note.

In the past 10 years, quarterly inflows into target-date funds have averaged $10 billion. This figure was about $13 billion per quarter over the past three years, the research group says.

As of Sept. 30, assets in target-maturity funds were about $577 billion, a 24% increase from a year ago.

As for their Q3 performance, target-date funds outperformed both U.S. large-cap stocks and bonds, which rose 5.2% and 0.6%, respectively, Ibbotson says. In the prior quarter, target-date funds didn’t keep up with S&P 500 and declined 0.6% on average.

“Non-U.S. developed equities and small-cap equities helped push target maturity fund performance higher, while funds with greater REIT exposure tended to underperform this past quarter,” the authors explain. Funds that had exposure to commodities, TIPS, emerging markets and REITs lost ground amid the poor performance of those asset classes.

Of the 420 target-date funds tracked by Chicago-based Ibbotson, 187, or 45%, outperformed their respective Morningstar index. As for target-risk funds, they ticked up 4.7% on average during the third quarter and 11.1% over the past 12 months.

This group had healthy fund flows of nearly $4 billion, with moderate-risk funds picking up the majority of the flows, Ibbotson says. As of the end of Q3, total assets in target-risk funds topped $675 billion, a 14% jump from a year ago.

Target-date assets continue to be dominated by Fidelity, Vanguard and T. Rowe Price, which have nearly 75% of the market. Groups with 2-4% of assets include American Funds, JPMorgan, TIAA-CREF, Principal, Wells Fargo and John Hancock.

Some 50% of assets are in 2016-2030 funds. But funds dated 2051 and beyond are seeing the highest growth increases, Ibbotson reports, as more 20-year-olds enter the work force.

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