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Ibbotson Shares Results for Target Dates, Asset Groups

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During the final quarter of 2014 the average target-date fund gained 1.7%, trailing both the S&P 500 (4.9%) and the Barclays U.S. Aggregate Bond Index (1.8%). Still, target dates surpassed the results of the Morningstar Lifetime Moderate Index in Q4’14, which was 1.2%.

For the full year, the average target-date fund improved 5.3%, topping the index’s 5.2% yearly performance but underperforming the S&P 500′s 13.7% gain and the Barclay’s bond index’s 6.0% improvement.

“Within U.S. equities taking on risk paid off as small-cap equities beat its large-cap counterparts by nearly 5%,” explained Jeremy Stempien, director of investments for Ibbotson Associates, a unit of Morningstar, in a recent report.

“Small-cap growth stocks returned double digit returns with a 10.1% gain over the period, whereas large-cap growth equities returned significantly less with a 4.8% return. Value stocks saw similar outperformance with small-cap value returning 9.4% versus 5.0% for its large-cap value counterparts,” he noted.

Commodities had a bad time, dropping 12.1% in the fourth quarter. REITs, though, were the top-performing asset class with a return of close to 13% in the period.

Full Year

Equities tended to outperform fixed income in 2014, as has been the case in four of the last five years, according to Stempien.

“Within the risk spectrum, those asset classes that typically take on less risk outperformed those that take on more risk, as can be seen with U.S. large-cap stocks outperforming U.S. small-cap stocks significantly during the period,” he explained.

Growth and value stocks within the U.S. performed “relatively similar overall,” the investment expert says. However, large-cap value outperformed small-cap value by 9.3%, and large-cap growth outperformed small-cap growth by 7.4%.

Developed non-U.S. equities lost 4.5% last year, while emerging-market equities fell 1.8% in 2014. Commodities declined 17%.

REITs, meanwhile, bounced back from a modest performance in 2013 with “an exceptional year” in 2014, returning 28%.

Fund Flows

In the fourth quarter of 2014, target-date funds had nearly $6.5 billion in asset inflows, about half the historical three-year quarterly average of $13 billion.

“The asset growth of the retail target-date industry continued to slow down over the past year, as the organic growth rate fell below 1% in the fourth quarter of 2014 compared to 3% in the first quarter of the year,” according to Stempien.

A key reason for the weak growth, he says, is that fewer new retirement plans are putting target-date funds into their lineups. Plus, more plans are moving assets into collective trusts or custom target-date strategies.

American Funds had inflows of $3.2 billion in Q4, as T. Rowe Price and Vanguard brought in $1.7 billion and $1.6 billion, respectively.

Total assets under management in retail target-date funds were $702 billion at the end of the fourth quarter, a jump of $15 billion from the previous quarter.

Vanguard has some $193 billion in target-date funds, followed by Fidelity with $187 billion and T. Rowe Price with $122 billion. “The three firms continue to dominate the market, as they collectively manage 72% of the industry’s assets,” Ibbotson Associates noted.