Target Maturity Fund Performance Climbs Back Up in 2009

At the end of 2008, Ibbotson Associates reported that among funds with at least one year of history, the average target maturity fund lost 30.8% and all 264 funds lost money. Switching to 2009, the average target maturity fund gained 27.1% and all of the now 322 funds made money, the report says.

The average target-maturity fund returned 4% during the fourth quarter, somewhat below the S&P 500 Index, which gained 6%. The weighted-average return of the 13 indexes that collectively form the Morningstar Lifetime Moderate Index family was 4.6%. For the year, the Morningstar Lifetime Moderate Index family gained 27.3% in 2009, while the S&P 500 Index gained 26.5%.

The average 2010 fund earned 3% for the fourth quarter and the average 2020 fund saw a 3.6%-gain, according to the report. The average 2030 fund posted a 4.2%-gain, while the average 2040 fund earned 4.5%. The average 2050 fund earned 4.7%.

All of the asset classes that typically make up target maturity funds had positive returns, including cash that had a positive .04%-return. Ibbotson said that like last quarter, most of the fixed income asset classes were slightly positive, while high-yield bonds produced equity-like returns of 6.2%, helping the performance of target maturity funds that implement a portion of their fixed income asset allocation with high yield.

Real estate, commodities, and emerging market stocks were the standout performers. Within U.S. equities, large cap stocks beat small cap stocks and growth stocks beat value stocks, reversing the dynamic of the previous quarter.

On an annual basis, all of the asset classes had positive returns. Within the fixed income asset classes, inflation-linked bonds or TIPS significantly outperformed nominal investment-grade bonds. High yield produced a return of 58.2%. Within equities, emerging markets returned 79%. Among U.S. equities, growth stocks significantly outperformed value stocks while large-cap stocks slightly outperformed small-cap stocks during the year.

Positive sentiment toward target maturity funds strengthened during the fourth quarter, and estimated flows improved to almost $14 billion as compared to the third quarter’s $11 billion. Flows in each month of the fourth quarter were higher than any of the previous seven months. 2021-2025 funds stood out, with flow growth at 10% versus the third quarter’s 7% clip.

As a group, target-maturity funds enjoyed more than $45 billion in net flows for 2009, a modest increase over 2008’s $43 billion. Thanks to the stock market’s recovery as well as new investments, assets in target maturity funds increased from $159 billion at the end of 2008 to $256 billion by the end of 2009.