| NEW YORK, March 21
NEW YORK, March 21 If there has been a
grand-slam home run among investment products in recent years,
it is the target-date retirement fund.
A one-stop shopping choice for many retail investors,
target-date funds allow an investor to pick a retirement date -
say 2030 or so - and the mix of underlying investments is
adjusted over time to support that goal.
Their popularity has proved eye-popping since they came into
vogue, especially since 2006 when they were approved by Congress
as default investment options in 401(k) plans. They house more
than $582 billion in total assets as of the end of January,
according to mutual fund research firm Lipper, a Thomson Reuters
company. That includes a fresh $5.1 billion in inflows over
"Over the last five years, target-date funds have attracted
the majority of assets flowing into equity funds," says Tom
Roseen, senior analyst at Lipper. "That is an amazing
The reason for this is that a lot of do-it-yourself
investors have thrown in the towel, and just want to have their
money professionally managed without worrying over how to
allocate for themselves, Roseen says.
Like elegant watches, such funds may look simple from the
outside, but their insides contain a complicated matrix of
interlocking gears. And that accounts for very different
results, depending on which target-date fund you are talking
One winner of the 2014 U.S. Lipper Fund Awards: Retirement
2015 from Baltimore-based fund shop T. Rowe Price, for
those investors on the cusp of retiring. The fund generated
returns of 15.18 percent for 2013, throttling category averages
over the one-, three- and five-year periods.
But that was just one of a flurry of winners for the T. Rowe
Price fund family. They also secured nods for their retirement
funds (offered in five-year increments) all the way through
Think of target-date managers as the mad scientists of the
investing world, throwing many different elements into the
cauldron. So what's the secret to getting that mix just right?
"Our funds tend to have higher-than-average equity
allocation for folks nearing retirement," says Jerome Clark, a
portfolio manager who oversees the firm's target-date products.
"In this environment, that allocation has boded very well for
The composition of its 2015 fund at the end of 2013 included
40.3 percent domestic stocks and 18.5 percent foreign equities,
a healthy percentage that has benefited from a robust stock
market. However, it makes for higher-than-average risk in the
event of a potential meltdown.
As with other target-date funds, that mix is continuously
tweaked, edging toward more conservative investments such as
fixed income and cash the closer one gets to retirement.
That so-called glidepath is the key to the success of
another fund family in the space, American Funds from the Los
Angeles-based Capital Group Companies. In fact, American Funds
also hauled in multiple Lipper Awards this year, for funds with
retirement target dates all the way through 2055.
"There are two kinds of glidepaths out there," notes Brad
Vogt, Capital Group's senior vice president and portfolio
manager who helps oversee the firm's target-date offerings. "For
some, the investment mix basically fixes at the retirement date.
For ours, that mix evolves all the way through retirement, and
that approach has worked well for us."
After all, someone retiring at age 65 likely still has a
very long road ahead. Average American lifespans have been
heading up for decades and are now at 82.2 years for women and
77.4 years for men. This makes "longevity risk" a critical part
of portfolio managers' thinking.
"That retiree needs to keep up with inflation, and rising
costs for medicine, for housing, for food and travel," Vogt
says. "If they have a highly preservation-oriented portfolio of
fixed income or cash, they would lose ground. And if you lose
ground over 20 years, you really lose ground."
That explains American Funds' relatively high equity
allocation, which has helped returns through the robust bull
market, notes Lipper's Roseen. Another factor in recent success
is that its managers have so far resisted tossing in alternative
investments like Real Estate Investment Trusts (REITs) and
Many other fund managers in the target-date space have done
so, to seek out uncorrelated assets and broader diversification.
But those alternative sectors got "clobbered" last year, says
Roseen, which benefited American Funds' more streamlined
Notably, target-date offerings from T. Rowe Price and
American Funds boast expense ratios well below the category
average, which has also assisted them in their outperformance.
T. Rowe Price's Retirement 2015, for instance, charges an
expense ratio of 0.65 percent, which is considered low for a
Of course, not all fund families have been seeing similar
success with their target-date fund series. In recent years
prominent names like Columbia, Oppenheimer and Goldman Sachs
have shuttered their own offerings.
(Follow us @ReutersMoney or here;
Editing by Beth Pinsker and Matthew Lewis)