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Portfolio > Mutual Funds > Equity Funds

Morningstar Issues New Research on Target-Date Fund Performance

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Morningstar has issued a series of target-date ratings and reports with data through the second quarter of 2010 for 20 of the largest target-date series in the industry.

With more than $270 billion in assets as of June 30, “target-date funds are quickly becoming the primary retirement savings vehicle for many 401(k) participants,” the fund research group said in a statement.

The reports note that portfolio managers of several series made changes designed to limit the volatility of returns. Some managers of series offered by Oppenheimer, T. Rowe Price, Principal, and ING introduced stakes in alternative assets; AllianceBernstein began using a quantitative model to forecast equity-market volatility so management can move some assets to cash.

The Morningstar data shows that the industry average-expense ratio declined to 0.88% from 0.91% a year earlier for those target-date series that are at least 18 months old.

Morningstar analysts noted that:

– Over the trailing three-year period, the American Century Livestrong series was “one of the stronger performers in the target-date world, with most of its funds ranking in their respective categories’ top decile.” The series’ relatively conservative asset allocation gave it a boost during the ’08 downturn and the first half of ’10, but as expected, weighed on its relative performance during ’09′s market rally.

– The American Funds Target Date Retirement series “performed respectably during its first three years.” The longer-dated funds held up better than many peers in ’08′s market turmoil, and the rally of ’09 benefited the equity-heavy, short-dated funds. The funds’ performance this year “has been mixed, but Morningstar’s attribution analysis shows strong selection and low fees have added value.’

– Fidelity’s Advisor Freedom Funds delivered solid returns when stocks rallied in 2009, and most underlying holdings fared well. “The funds’ five-year records have improved over the past year and range from middling to good,” Morningstar said in its report.

– Fidelity Freedom’s target-date funds have had “relatively strong” performance over the past five years.

– The JPMorgan SmartRetirement funds held up relatively well in 2008, and in 2009, “strong underlying fund performance overcame the series’ relatively conservative glide path. Over the trailing three-year period through June 2010, most funds in the series rank comfortably in their categories’ top quartile.”

– The MFS Lifetime funds have been above-average performers thus far. They were helped by the strong relative performance of the series’ conservatively positioned shorter-dated funds in ’08, “as well as by superior stock-picking.”

– The three-year performance of Schwab’s target-date fund series “looks better on a risk-adjusted basis. The series’ longer-dated funds benefited from a relatively conservative equity allocation in 2008′s downturn. Glide-path changes in 2009 will make its longest-dated funds more aggressive and shortest-dated funds more conservative in the future.”


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