Non-U.S. Equity Returns Boosted TDF Performance for Q2

The median equity exposure of equally weighted TDF vintages is 60%; equity exposure ranges from as high as 68% to as low as 51%, according to an analysis by Callan.

By Javier Simon | August 03, 2017

Equity exposure of equally-weighted TDF vintages ranges from 68% to 51%, according to an analysis by Callan.

Target-date funds (TDFs) pushed forward from their first-quarter gains to generate an average return of 2.83%, according to the latest Callan Target Date Index results. Callan Associates attributes most of this success to diversification and the performance of non-U.S. equities. The average TDF devotes 26% of assets to non-U.S. developed market exposure during the accumulation phase.

The MSCI World ex-USA Index in particular returned 5.87%. However, domestic equity gains also delivered a boost to TDF performance with the S&P 500 Index generating 3.09%. On the other hand, bond market exposure delivered a slight drag on TDF returns with the Bloomberg Barclays U.S. Aggregate Bond Index gaining just 1.45%, the firm notes.  

Callan points out that long-term vintages which devote significant exposure to equity have benefited from the positive performance of global stock markets in the second quarter. They outperformed near-dated vintages, where fixed income played a larger role. Callan found that the median 2050 target date fund gained 3.84% in the second quarter and 16.9% throughout the trailing year. Meanwhile, the median 2015 TDF gained 2.33% in the second quarter and produced 8.64% for the trailing year.

Demonstrating the value of TDFs, research suggests the recent boons in stock market performance may cause those managing their own retirement to skew too much toward equities.

Callan also reported that “the median target-date manager outperformed the Callan Target Date Index by 39 basis points for the trailing year. Over the trailing five-year period, the median target date manager essentially matched the return of the Callan Target Date Index.

For the second quarter, the spread between best and worst performing managers narrowed from the first quarter, with those in 90th percentile gaining 2.11% and those in the 10th percentile returning 3.37%. Callan notes the spread was meaningful when analyzing performance throughout the trailing year. In this case, managers in the 90th percentile returned 8.96% while those in the 10th percentile posted maximum gains of 14.07%.

Callan also analyzed fees connected to TDFs. In this analysis, the group includes the lowest fee share class of mutual funds as well as collective trusts. It found the median TDF’s expense ratio to be 0.46%. Overall, expense ratios spanned from 0.10% in the 90th percentile to 0.76% in the 10th percentile. Callan attributes most of the difference to active versus passive strategies in determining the glide path.  

The Callan Target Date Index is an equally weighted composite of 44 target date fund series, including both mutual funds and collective trusts. A full analysis of the index can be found at