Despite general praise for the product, target date funds struggled in 2015. A positive fourth-quarter performance was not enough to pull target date funds out of negative territory for the year, according to Callan Associates. The Callan Target Date Index posted its first annual loss since 2008.
The downturn came as several large target date fund managers reported increasing their glide path allocation to equities over the past several years, said Lori Lucas, head of Callan’s Defined Contribution practice.
“After the carnage of 2008, when the median target date fund lost 26.41 percent, target date fund managers generally decreased their glide path allocations to equities and improved their overall diversification,” Lucas said in a statement.
On the aggregate (equal weighting all providers) there was an increase in equity exposure along glide paths in 2015.
With total returns on broad-based indices either flat (1.3 percent for the S&P) or down (-4.4 percent for the Russell 2000 Small Cap and -5.25 percent for the MSCI ACWI Non-U.S.), the increase in equity weighed on many target date fund providers. Many providers simultaneously increased the share of international equity within their equity allocation, which in many cases also hurt performance, as international equity (as measured by ACWI Ex-U.S.) trailed both the S&P 500 and the Russell 2000.
Notably, the range of target date fund performance narrowed considerably when compared to 2008, as well. That year the range between best and worst-performing target date funds (as measured by the tenth and ninetieth percentiles) was more than 22 percentage points. In 2015, the best and worst performers differed by fewer than two percentage points.
Target date funds did rebound nicely in the final quarter of 2015, returning 3.01 percent as measured by the Callan Target Date Index. Target date funds benefited primarily from domestic equity exposure during the quarter, with the S&P 500 gaining 7.04 percent. Though the domestic stock market enjoyed strong performance, bonds declined -0.57 percent as measured by the Barclays U.S. Aggregate Index.
The Callan Target Date Index is an equally weighted composite of 44 target date fund series, including both mutual funds and collective trusts. It is updated quarterly. The Index allows plan sponsors, managers, and participants to track the performance and asset allocation of available target date mutual funds and collective trusts.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
Of note, that while Callan’s own funds, The Callan GlidePath Funds, have been characterized by some as “aggressive”, their 3 shortest date funds continue to be ranked #1 by Lipper for 2015 (and for 3 and 5 years). This means the 3 funds designed for retirees, and those about to retire, produced positive returns in the very difficult environment of 2015, and also outperformed in the market rally of 2011-2014.