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May 24, 2012 at 08:00 PM
The average return for target-date funds during the first quarter of 2012 was close to 9%, which is about 3.5% below the S&P 500 Index but more than 8.5% better than the BarCap U.S. Aggregate Bond Index, according to a recent report authored by Tom Idzorek, global chief investment officer of Morningstar Investment Management, and Jeremy Stempien, director of investments for Ibbotson Associates.
For the second consecutive quarter, all target-maturity funds with at least a one-year history ended the period with a positive return. Those funds furthest from retirement had the strongest relative performance, as equities significantly outperformed fixed income, the report authors say.
New assets combined with the strong equity performance led to total assets for target-date funds topping $429 billion, an all-time high.
With equities, the momentum from strong performance during the fourth quarter of 2011 carried forward into the first quarter of 2012, with U.S. equities continuing on their roll. The S&P 500 rose 12.6% during the quarter.
Non-U.S. equities also saw improved performance, despite the continued economic turmoil in Europe, according to the Morningstar/Ibbotson research. A lingering low interest rate environment led to a mild performance for fixed income. The combined effect was strong outperformance of target-maturity funds further from retirement, since those funds tend to allocate much higher levels to equity.
Performance Update
Target-maturity funds enjoyed a nearly 9% return for Q1 thanks to the boost provided by equities. This was the highest return since the third quarter of 2010, when the average target-maturity fund return reached double digits, according to Idzorek and Stempien.
The average target-maturity fund return had a higher return than the average return of the Morningstar Lifetime Moderate Index besting it by 0.3%, which was also the case during the fourth quarter of 2011. Over the past 12 months, though, the index outperformed the average return of target maturity funds by 1.5%.
Fund Family Performance
The performance of nearly 390 target-date funds in about 50 fund families is being tracked by Morningstar and Ibbotson, and recent research found that the overall returns for funds in similar vintages had a very tight range resulting in a clustered set of fund family lines during this period.
Over the 12-month period, there was much less of a pattern among fund-family lines compared to the quarterly graph, and a few families separated themselves from the pack due to their individual-fund strategies.
