Target-Date Funds Underperform in Q114

According to its “Quarterly Target-Date Fund Report,” the average target-date fund gained 1.5% in the first quarter of 2014, falling slightly below the returns of the S&P 500 and the Barclays U.S. Aggregate Bond Indexes. As target-date funds typically comprise both equity and fixed income, the report notes that it is uncommon to see their performance fall below the two indexes.

However, the report notes, performance for the average target-date fund was hampered by diversification into non-U.S. equity markets, which underperformed domestic equity and bond markets in the first quarter. For the full 12 months ending in March, target-date funds experienced very strong performance with the average target-date fund ending the year with a 12.1% return as domestic equity markets had a great run. U.S. equities, as represented by the S&P 500, posted strong returns of 21.9% while its bond counterparts struggled with a 0.1% loss for the 12-month period.

In addition, the report says:

• Fund family performance was largely affected by the differences in international equity exposure and exposure to asset classes such as real estate and commodities. In the first quarter, fund families with less international exposures and those with more real estate and commodity exposure performed better than peers.
• Flows into target-date funds continued at a healthy clip. Total assets in retail target-date funds were over $648 billion at the end of March, representing a 22% increase from a year ago.

As for target-risk funds during first quarter 2014, Ibbotson documented in its “Quarterly Target-Risk Fund Report” that target-risk funds gained 1.4% on average for the first quarter and 10.9% over the past 12 months.

During the quarter, returns were boosted by REITs, commodities and longer duration fixed income asset classes that are commonly used in target-risk programs. Over the last year, aggregate domestic fixed income securities (as measured by the Barclays U.S. Aggregate Index) posted a loss of 0.1%. This typically hurt more conservative target-risk portfolios.

In addition:

• For the first time since fourth quarter 2012, target-risk funds saw outflows, with $1.5 billion in assets departing the category during the quarter, mainly from conservative-oriented funds.
• Target-risk funds continue to see total assets climb to all-time highs. As of the end of first quarter, total assets in target-risk funds were more than $722 billion, a 12% increase from a year ago.

Ibbotson Associates is a registered investment adviser and a subsidiary of Morningstar, Inc.