Highlights from Morningstar's 2014 Target-Date Series Research Paper.
Morningstar recently released its 2014 Target-Date Series Research Paper. Here are a few of the findings that may matter the most to target-date fund investors, via some of the paper's most interesting--and sometimes surprising--charts.
1. What a Difference a Year Makes
To the chagrin of some fund companies and the relief of others, target-date series saw their 2008 returns roll off of their five-year performance numbers in 2013. For many series, losing the record connected to that year’s market turmoil resulted in dramatic changes in their relative results.
Exhibit 1 averages the return ranks for each target-date series’ vintage years for the five years as of year-end 2013 and compares them with the five years ended 2012 (which includes 2008 results). On average, series saw more than a 20-point difference in their average ranks. In contrast, the change from 2011 to 2012 produced an average difference of just 10 points.
The Invesco Balanced-Risk Retirement series saw the most dramatic change: For the five years through year-end 2013, funds in the series ranked, on average, in the 85th percentile; it previously averaged in the 13th percentile over the five years through 2012. Invesco has one of the more unusual asset-allocation glide paths in the industry, with a large emphasis on commodities. Its change in standing is an extreme example of how a series that had strong trailing returns in 2012 saw the tide turn in 2013.
More equity-heavy series saw the opposite phenomenon, with the John Hancock Retirement Living series seeing the largest improvement. Its average rank improved from the 62nd percentile in 2012 to the 11th percentile in 2013.
2. Veteran Managers Have Delivered Results
Among target-date series, more-experienced managers have generally delivered better results. That’s reflected in Exhibit 2’s upward-sloping graph: Series that use underlying funds with longer average manager tenures (those at the top of the chart) tend to have better Morningstar Ratings (those to the right). Target-date series managers (the managers who run the target-date funds themselves, as opposed to the underlying funds) with longer tenures are also associated with better series performance, as demonstrated by the graph’s larger circles generally falling to the right side of the exhibit.
That combination has worked especially well for T. Rowe Price Retirement, which enjoys some of the industry’s longest-serving managers and also has an average Morningstar Rating of 4.8 stars. That showing is outpaced only by the TIAA-CREF Lifecycle Index series, which averages 4.9 stars. The managers of TIAA-CREF’s underlying funds average just 5.3 years of tenure, but given the straightforward nature of index investing, longer tenures at the underlying funds arguably hold less sway over series’ results. Instead, those target-date funds have benefited from a glide path that tends to favor equities relative to the competition.