Target-date funds had average total returns of 5.4% for the fourth quarter of 2013, according to a recent Ibbotson Associates report.
Those returns fell behind those of the S&P 500 (10.5%), mainly due to target-date funds' holdings in non-U.S. equities, bonds and real-return asset classes, like real estate investment trusts and commodities.
For the 2013 calendar year, the average total return for target-date funds was a respectable 16.3%. This performance (again) was roughly half the S&P's jump of 32.4% and behind the results of foreign developed-market stocks, which gained 23.3%.
But target-date funds topped returns of many other investment categories for the year, including high-yield bonds (7.4%) and REITs (3%). Categories with losses last year included commodities (-9.5%), Treasury inflation-protected securities (-8.61%), and bonds as measured by the Barclays U.S. Aggregate Bond Index (-2%).
Morningstar (MSTAR) analyst Josh Charlson points to the Vantagepoint Milestone 2045 (VQRJX) as the top performer in the 2141-2045 group, with '13 returns that nearly reached 28%. Other fund families with strong results in 2013 include American Funds, T. Rowe Price and TIAA-CREF.
"Although that [28%] gain does not match the 32% leap of the S&P 500 Index in 2013, the numbers are impressive nevertheless, especially considering that the typical 2045 fund held at least 10% of assets in bonds and devoted a significant portion to non-U.S. stock markets, which did not keep up with U.S. equities," explained Charlson in an online report.
During Q4, flows into target-date fund had a sizeable rebound, nearing $13 billion compared with $2.3 billion in the earlier period.
Target-Date Issues
At the end of 2013, one-third of retail investors' target-date fund assets were in passively managed target-date funds, up from 24% five years ago.
Total assets held by investors in target-date funds were nearly $621 billion, a 28% jump from the end of 2012, thanks to both bullish equity markets and continued positive flows. Fidelity, Vanguard, and T. Rowe Price hold more than 73% of the retail market, but this share continues to decline.
Still, Vanguard's index-based target-date series, for instance, took in more than $18 billion in new assets last year — more than double the new assets of any other target-date fund series.
While retirement plan sponsors infrequently switch from one target-date series to another, leading target-date providers are seeing changes in their asset levels, according to Jeremy Stempien and Cindy Galiano, both directors of investments for Ibbotson, which is a unit of Morningstar.
