September 9, 2009 / 10:49 PM / 9 years ago

Target-date U.S. mutual fund disclosure called 'lousy'

* Comes amid calls for more regulation

* Report gives high marks to Vanguard and T Rowe Price

By Ross Kerber

BOSTON, Sept 9 (Reuters) - Target-date mutual funds, the investment vehicles popular with many U.S. retirees, need to better disclose the wide range of strategies they follow, according to a new report by Morningstar Inc (MORN.O).

Calls for more regulation of such funds, designed to be safe for older investors, have risen after some funds posted abysmal returns. A widely cited example is the Oppenheimer Transition 2010 fund aimed at people 60 and older, which fell 41 percent last year, worse than major market indexes.

“The disclosures from the fund companies are lousy,” Laura Lutton, a Morningstar editor and co-author of the report issued on Wednesday, told Reuters. “Nobody blew us away in terms of the information they were presenting to investors.”

Target-date funds try to allocate savers’ investments based on their schedule for retirement and the level of risk they are willing to accept before and after they stop working. The fast-growing sector has taken in more than $140 billion since the start of 2007.

Morningstar said its report is the most comprehensive to date on target-date funds. It rates the funds on criteria like fees and performance, and gave high ratings to some of the largest fund families including T Rowe Price and Vanguard.

It also emphasizes the wide range of approaches the funds use. Conventional wisdom holds that investors should shift their holdings from more stocks to more bonds as they get older, trading higher returns for more stability.

Some fund companies keep more stocks in the mix longer. Morningstar called that strategy defensible so long as it is fully described — which doesn’t always happen.

“Based on the current information on fund companies’ websites and in filings with the SEC, it’s tough — if not downright impossible — for individual shareholders to understand how their target-date funds were designed, and how they’ll work (and may perform) going forward,” the report states.

Morningstar gave high overall grades to target-date funds offered by American Funds, T Rowe Price Group (TROW.O) and Vanguard Group Inc, which together manage more than $80 billion in assets and account for three of the five largest target-date fund families. American Century Funds also earned high marks.

The two lowest rated providers were Oppenheimer, a unit of MassMutual Financial Group, and Principal Financial Group PFG.N, whose $12.7 billion in target-date assets were the fourth-largest in the sector.

Both companies’ funds were dragged down by heavy holdings in stocks last year. Oppenheimer’s target date funds also were undone by heavy bond holdings in toxic mortgage-backed securities.

An Oppenheimer spokeswoman said it has since replaced managers and adjusted its asset mix. A Principal spokeswoman did not immediately return messages.

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