A Vanguard news release said the new study “Target-Date Funds: Looking Beyond the Glide Path in 2008” by the firm’s Investment Counseling & Research Group found that the losses realized in 2008 in the equity portions of target-date funds were magnified by larger allocations to developed and emerging international markets, whose results lagged the U.S. stock market by 6 and 16 percentage points, respectively.
Funds with lower overall stock allocations and those maintaining a “home bias” to U.S. markets fared better, according to the study. Similarly, Vanguard researchers found that funds with higher overall bond exposure and relatively higher allocations to U.S. government bonds performed better.
“Over the long term, a target-date fund’s broad asset allocation to stocks, bonds, and cash will likely be by far the most significant driver of performance. But in the short run, specific allocations within the stock and bond asset classes can play a much more significant role in performance and risk exposure. The bottom line is that risk isn’t just relegated to stocks,” said John Ameriks, head of the research unit.
Vanguard examined the target-date funds of four providers, analyzing their allocations to the broad stock and bond asset classes; the weightings of their sub-asset classes; and exposure to nontraditional and alternative asset classes.
For stocks, sub-asset classes included U.S. stocks, and international stocks from developed and emerging markets. Sub-asset classes in bonds included corporate issues, mortgage-backed securities, and U.S. government bonds. Alternative asset classes included real estate and commodities.
“Bond allocations vary from one fund to the next in terms of sector allocations, duration, and credit quality. In volatile stock markets, corporate bonds can exhibit a high correlation to stocks, which can diminish a portfolio’s diversification benefit and negatively impact performance,” concluded Ameriks, who noted that this phenomenon was especially evident in near-dated funds that maintain sizable bond allocations but had poorer returns than funds with more stock exposure.
More information is available at www.vanguard.com.