Asset Allocation Funds Post Strong 2013

Target-date funds had an average total return of 5.4% for the fourth quarter of 2013, according to Morningstar data.

However, returns were significantly less than the 10.5% return of the S&P 500 due to poor performance in non-U.S. equities and bonds, the “Ibbotson Target-Date Report 4Q 2013” shows. For the 2013 calendar year, the average total return for target-date funds was a very strong 16.3%.

Dispersion of returns across target-date fund families was large relative to past quarters’ variance. Equity-centric target-date funds, particularly those with a tilt toward U.S. equities, tended to achieve the highest returns. Those funds with exposure to real return asset classes such as real estate investment trusts (REITs), commodities, and Treasury inflation-protected securities (TIPS) struggled relative to peers.

Flows into target-date funds bounced back in a big way from the anomaly seen during the third quarter of 2013 when estimated net inflows were a mere $2.3 billion, the report says. During the fourth quarter, estimated flows into target-date funds neared $13 billion, more in line with the recent past.

According to the “Ibbotson Target Risk Report 4Q 2013”, target-risk funds gained 5.0% on average for the fourth quarter and 14.9% over the past 12 months.

Flows into target-risk funds were healthy with more than $2.0 billion flowing into the category during the quarter. Growth-oriented funds gathered the majority of the flows.

Target-risk funds continue to see total assets climb to all-time highs. As of the end of Q4, total assets in target-risk funds were near $713 billion, an 18% increase from a year ago.

The firm analyzed durations and found few target-risk funds are actively lowering interest rate risk ahead of expected tapering of the Federal Reserve’s bond purchase programs.

Josh Charlson, a strategist for the fund of funds research team for Morningstar, discusses target-date fund performance in 2013 in an article here.