Have Target-Date Funds Improved Their 'D'?
Recent market turbulence provides a test of these funds' resiliency.
Target-date fund providers have gotten the message. One of the chief complaints about target-date funds since the 2008 market collapse was that 2010 category funds--those aimed at that time for investors planning to retire within a couple of years--had not adequately protected nest eggs. Many portfolios, often loaded with stocks or high-yielding, lower-rated bonds, surprised investors with significant losses prompting politicians and federal regulators to hold hearings and issue reports. While the government hasn't decided to mandate risk levels as a result, many mutual fund firms have made changes on their own anyway.
This year's correction is the first opportunity to test whether those revamped strategies have made a difference. Although the swoon has lasted only a few months and may not yet be over, the drop has been steep enough and long enough to warrant doing a gut check on this group.
Formulating the Comparison
In choosing time periods to compare, I took the peak-to-trough period of the S&P 500 during the recession (Oct. 9, 2007, to March 9, 2009) and the S&P's peak-to-trough so far for 2011 (April 29 to Aug. 8). And to measure how resilient the funds were, I opted for a simpler, homespun version of downcapture ratio. For each target-date fund or category, we divided its return for the period in question by that of the S&P 500, arriving at what we can call a "loss ratio" versus the S&P 500.
Josh Charlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.