Target-Date Funds Boost Assets but Underperform in Q2: Morningstar

The average target-date fund posted returns of close to 4% return in the second quarter of 2014, according to Morningstar. The funds were buoyed by U.S. large-cap, emerging market and real estate equities, the research firm says in a report released Wednesday.

“During the second quarter of 2014, the average target-date fund gained 3.8%, falling in between the returns of the S&P 500 and the Barclays U.S. Aggregate Bond Indexes,” explained Jeremy Stempien and Cindy Galiano in the report, which was compiled by Ibbotson Associates and tracks 451 funds from 50 fund families.

In the quarter, emerging market equities rose 6.7%. Real estate equities improved 7.1%

For the 12-month period, the target-date funds had average returns in the high-teens territory; these results were tied to strong equity gains in the period. The average return was 17% compared to 24.6% for the S&P 500.

The major U.S. equity categories have improved 22.5% and up over the past 12 months, while emerging market equities rose 14.7%. Large-cap growth equities, for instance, jumped 26.9%. During the period, high-yield bonds increased 11.7%.

Still, target-date funds continue to slightly underperform vs. their Morningstar Moderate Index counterparts; these indexes, though, have the advantage of not incurring expenses and have slightly above-average allocations to emerging markets.

“The higher the equity-to-fixed income ratio a target-date family held, the better it performed over the quarter,” the report authors noted, adding that fund families favoring large-cap and value names performed better than their peers. “On the fixed income side, fund families with higher allocations to high-yield bonds and TIPS performed better than those with a more basic allocation of government and securitized debt.”

The Morningstar/Ibbotson analysts also highlight two key industry trends.