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A Much-Maligned Fund Group Bounces Back

After suffering in the bear market, 2010 funds regain some respect.

Josh Charlson, 01/04/2010

As the calendar turns over to 2010, the group of mutual funds built for investors intending to retire in or around that year has taken important steps toward restoring its tarnished reputation.

Target-date funds were subject to a maelstrom of investor ire and governmental scrutiny over the past year, and none more so than 2010 funds. In calendar-year 2008, that group of funds lost an ungainly 23% on average.

That was a tough pill to swallow for investors preparing to dip into their nest eggs or who mistakenly thought their investments were conservatively positioned so as to avoid most of the perils of a bear market. In fact, all of the target-date 2010 offerings provide some exposure to the equity markets, and those that are most concerned by longevity risk--the risk that investors will outlive their savings--tend to invest upward of 50% of assets in stocks. So, losses among these funds should not have been a big surprise. But the magnitude of some losses (with the hardest-hit fund cratering with a 41% loss) was certainly alarming.

While governmental agencies and Senate subcommittees were convening hearings on the target-date industry in 2009, many 2010 funds were making back a good chunk of their investors' money. And while it's too soon to say that 2010 funds have completely dug out of their hole or that the concerns expressed about them were entirely misplaced, the gains through November 2009 indicate that even with the shortest-dated target-date funds, investors have been better served by trying to take the long view.

Rebounding Returns
Through November, as the financial markets have rebounded sharply, the average 2010 fund has returned a healthy 20%, with the top performer rising 29%. It's no surprise to see that the funds at the top of the list are those that are trying to offset longevity risk with above-average equity weightings and, thus, incurred significant losses in 2008. John Hancock Lifecycle 2010 JLAAX, AllianceBernstein 2010 Retirement Strategy LTDAX, Hartford Target Retirement 2010 HTTAX, and T. Rowe Price Retirement 2010 TRRAX all fit this description.

Predictably, those fund companies that make guarding against market risk their first priority that held up best in 2008 have been laggards in 2009. Wells Fargo Advantage DJ Target 2010 STNRX and American Independence NestEgg 2010 NECSX, for example, which had the two best results in the group last year (losing 11% and 9%, respectively), occupy the bottom two slots in 2009. Vanguard Target Retirement 2010 VTENX, which plots a fairly defensive but not extreme glide path, has gained 18.8% for the year to date.PAGEBREAK

Full Circle
Now that the panic over 2010 funds has subsided, it's safe to take a step back and reflect on the implications of this group's performance patterns over the past two years.

One clear takeaway is that a glide path should not be judged solely on the basis of its short-term, or even intermediate-term, performance. Critics were too quick last year to label longevity-oriented glide paths a failure and to assume that glide paths intended to preserve capital near retirement were the only sensible approach. Similarly, prior to 2007, the drumbeat around longevity risk was loudest, while those worrying about the potential of market collapses could scarcely be heard above the din of the bull market. It will require full, multiyear cycles to determine the true worth of the varied approaches to glide-path construction.

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