The study, “Popping the Hood: An Analysis of Major Life Cycle Fund Families,” ranks six families of target-maturity funds using both quantitative and qualitative comparative analysis. The study was undertaken because, using fund analysis tools, Joe Nagengast, founder of Turnstone, realized that he could see how one 2020 fund stacked up against another, but there was no good way to compare family to family.
The fund families analyzed in the report are (in ranked order): Principal Investors LifeTime Funds, Vanguard Target Retirement Funds, Fidelity Freedom Funds, T. Rowe Price Retirement Funds, Barclays Global Investors LifePath Funds, and Wells Fargo Outlook Funds.
When he set out to do the study, Nagengast, said he had three criteria for inclusion: the fund family needed to have three years of performance history as of June 30, 2005; it needed to have substantial assets under management; and it needed to have a mutual fund structure. These three criteria left him with only four fund families; T. Rowe Price and Vanguard were left out because they did not meet the tenure requirement. However, Nagengast and his co-authors decided that it was “silly to complete the study without them,’ so they included those two fund families along with the other four, and just made a note in the research.
After completing his analysis, Nagengast said he found that the funds “seem to be doing a good job so far, but we have some concerns.’ Namely, he said, his concerns centered around fees and asset allocation. The six fund families in the study averaged all-in fees of 71 basis points, a number Nagengast says was significantly lowered by Vanguard’s very inexpensive fees without which, the average expense ratio would have been 79 basis points. In doing the study, Nagengast said he was concerned about fees because he and his co-authors think the funds should be looking to see how marketable and competitive they can be on an expense basis.
Nagengast also has concerns about the allocation of these funds, saying that the differences between the major allocation strategies of each fund are minor and the driving factor of the funds is a large stake in large-cap domestic equity.
In evaluating the fund familes, Turnstone factored six elements into its ratings:
- performance (30% of the overall score)
- allocation (20%)
- expenses (15%)
- modern portfolio theory (MPT) risk analysis (15%)
- up/down-market-capture analysis (15%)
- the funds’ structure (5%)
According to the report, all six fund families rated equally in the structure category, receiving four out of five possible points. That category included numerous elements such as fund inception, assets under management, and proprietary versus open architecture. In evaluating performance, Turnstone looked at both standard MPT analysis like standard deviation and the Sharpe Ratio, and analysis of up/downmarket performance.
Last week, Nagengast took part in a PLANSPONSOR Web cast (which can be accessed here) and said that he is already working on the second edition of the study. The first version evaluated funds based on data through June 30, 2005, and he thinks the second edition, which will hopefully be released near the end of the first quarter of 2007, will use data through year-end 2006.
This second edition should be different, as some funds have made significant changes since the first version of “Popping the Hood’ was released. For example, Wells Fargo has relaunched (and renamed) its funds as the Wells Fargo Advantage Dow Jones Target Date Funds, which it calls the first registered target-date mutual funds that track the performance of the global series of the Dow Jones Target Date Indexes. The funds also have a new subadvisor and the company also shifted the emphasis from active to passive management and altered the glide path used to determine at what pace a target-date fund will lessen its equity allocation.
A copy of the full report can be obtained at http://www.turnstoneag.com/Research.aspx.