Sturdy Target-Date Funds for Those Nearing Retirement

The bear market has provided a harsh reminder to target-date fund investors that broad diversification doesn't guarantee that they won't experience painful losses. Over the past 12 months, domestic stocks have been hit hard, foreign stocks have on average plunged even further (in part due to the rise of the U.S. dollar), and virtually all bonds outside of Treasuries have lost money--and convertible and high-yield bonds have been pounded. As a result, the nine Morningstar target-date fund categories other than retirement income have declined between 25% and 39%. True, investors in a lot of target-date funds have many years to make up ground before they retire and go from accumulating assets to withdrawing them. But those who hope to retire soon are in a more difficult position; they may have to work longer or learn to live with less in their golden years.

Thus, we think it's a good time to highlight shorter-dated target-date funds that have held up relatively well in this brutal environment, for those hoping to avoid sharp losses if conditions worsen in the coming years. We used Morningstar's  Premium Fund Screener to produce a list of such funds. First, we screened for funds in Morningstar's target-date 2000-2010, target-date 2011-2015, and target-date 2016-2020 categories, excluding 2000 and 2005 funds because they're designed for investors who are already retired and, thus, their more-conservative portfolios have a built-in advantage over 2010 target-date offerings in rough waters. Next, we looked for funds that have landed in their category's top quartile over the trailing 12 months yet stash at least 20% of their assets in U.S. stocks (to ensure that the funds have some appreciation potential in good times and aren't simply ultraconservative offerings). Finally, we excluded funds that had expense ratios above their category average or charged more than 1% (a reasonable maximum for funds that invest substantially in bonds and cash) and screened for funds that required no more than $10,000 for the initial investment.

Our search yielded 11 target-date funds from seven different fund shops. We weren't surprised to see  Vanguard Target Retirement 2010  ,  Vanguard Target Retirement 2015  , and  Vanguard Target Retirement 2020  (VTWNX) make the list. Their equity weightings hover around the middle of their categories, but their equity portfolios are composed of index funds--which have fared relatively well amid the turmoil due to liquid holdings at the top of their portfolios--and their fixed-income sleeves are dominated by  Vanguard Total Bond Market  (VBMFX), which tracks the high-yield-free Barclays Capital U.S. Aggregate Bond Index. What's more, the funds boast rock-bottom costs. True, the 2020 fund has lost 28% for the 12 months ended Feb. 13, 2009, and the 2015 and 2010 funds have lost 25% and 22%, respectively. But those funds' declines best their typical category rivals by several percentage points each.

American Century LIVESTRONG 2015  also made the cut. (The shop doesn't have any funds in the 2000-2010 category, and its 2020 fund didn't pass our screens.) The equity funds at the top of the portfolio are solid, for the most part, despite turnover among the firm's investment staff. And its fixed-income shop is rock-solid; the conservative bent of  American Century Diversified Bond (ADFIX) has paid off quite well lately. The fund has lost 21% over the past year, but that showing lands in the 2011-2015 category's top decile. We don't yet cover this fund, but it holds significant promise.

Another fund on the list is Federated Target ETF 2015 . (Federated also doesn't offer funds in the other two categories.) As its name implies, the fund invests exclusively in exchange-traded funds, such as  iShares S&P 500 Index (IVV). As a result, it does offer broad diversification at a fairly modest cost (0.49%), and its index-tracking ETFs have, on average, held up relatively well. However, the weighted expense ratio of the underlying ETFs was 0.22%, so investors paid an extra 0.27% for the fund's 12b-1 fee and possible asset-allocation moves by the fund's overseers (which may or may not add value). We're not convinced that the fund represents a great value proposition.

Here are the other results as of Feb. 13, 2009.

AIM Independence 2010 
Ridgeworth Life Vision Target 2015 
Schwab Target 2020 (SWCRX)
Vantagepoint Milestone 2010 
Vantagepoint Milestone 2015 
Vantagepoint Milestone 2020 

To run the screen yourself, click here. Don't have a Premium Membership? You can still use our Premium Fund Screener by taking a free 14-day trial.

Editor's Note: Information about American Century funds was corrected in this article on Feb. 18.Click to learn more.