The Markets August 6, 2014

Target-Date and Target-Risk Funds Performing Well

The average target-date fund (TDF) enjoyed nearly a 4% return for the second quarter of 2014, buoyed by U.S. large cap, emerging market and real estate equity holdings.
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While TDF performance was relatively strong for the quarter, many target-date products continue to underperform relative to their Morningstar Moderate Index counterparts, according to research from Ibbotson, part of the Morningstar Investment Management group of Morningstar, Inc.

Overall, TDFs had a good quarter in terms of performance and experienced healthy cash inflows, Ibbotson researchers explain. For the 12-month period ending at the conclusion of the second quarter 2014, the average total return for TDFs fell in the high-teens territory, thanks to strong equity gains in the period.

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Still, this is below returns for Morningstar Moderate Index counterparts often looked to as benchmarks for evaluating TDF performance. The indexes, besides having the advantage of not incurring active management fees and other expenses, have slightly above-average allocations to emerging markets stocks, which further bolstered returns in the second quarter. So they are not perfect benchmarks for TDFs, the researchers admit (see “A New Proposal for Evaluating Target-Date Funds”).

Although there are signs the industry is maturing, flows into target-date funds continued at a healthy clip, Ibbotson says. Total assets in retail target-date funds were over $690 billion at the end of June, representing a 27% increase from a year ago.

Looking to other common benchmarks, the average target-date fund return of 3.8% fell between the returns of the S&P 500 and the Barclays U.S. Aggregate Bond Indexes for the quarter. As TDFs typically comprise both equity and fixed-income holdings, it is common to see their performance fall between the two indexes, researchers explain.

For the full 12 months ending in June, TDFs experienced very strong performance, with the average TDF ending the period with a 17.0% return. As represented by the S&P 500 Index, U.S. equities posted even stronger returns of 24.6%, while the index’s bond counterpart experienced a muted 4.4% return for the 12-month period.

Ibbotson also published its quarterly evaluation of performance and asset flows for target-risk funds, which pursue a predefined level of portfolio risk instead of basing asset-allocations on a predetermined target retirement date. Highlights of the “Q2 2014 Target-Risk Report” from Ibbotson show target-risk funds gained 3.3% on average for the second quarter and 15.1% over the past 12 months.

Target-risk funds saw aggregate flows return to positive territory, Ibbotson says, as $1.8 billion in assets entered the category during the last quarter. As of the end of the second quarter of 2014, total assets in target-risk funds were more than $746 billion, a 15% increase from a year ago.

Highlights from the TDF analysis are here, while highlights from the target-risk fund analysis are here.

The Markets August 6, 2014

Optimism Index Shows Retirement Savings Worries

The Wells Fargo/Gallup Investor and Retirement Optimism Index slipped eight points in the second quarter to reach +29, driven by increased pessimism among retirees.
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The fall from +37 at the beginning of the year was driven largely by a 17-point decline (from +41 to +24) in optimism among retired investors, whose view of inflation and economic growth deteriorated during the quarter.

Still, the majority of investors surveyed by Wells Fargo and Gallup believe that the “American Dream” is still attainable, despite concerns about saving for retirement. Approximately 84% of investors who were surveyed note that the American Dream is achievable. According to the index results, investors view the dream as the ability to afford a home (93%) and enjoy a successful retirement (92%), while also having a good job prior to exiting the work force (92%).

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The survey revealed that 76% of Americans have a standard of living they consider to surpass that of their own parents. Nearly nine out of 10 non-retired investors said they are optimistic they will achieve the American Dream, versus 77% of retired investors. Researchers say this reflects the overall optimism of preretirees in the survey.

Joe Nadreau, head of innovation and strategy at Wells Fargo Advisors, notes that it’s not unreasonable for investors to openly pursue the American Dream. “The American Dream remains a pretty simple concept among investors: A home, a good job, and money to live on later in life,” he explains. Pursuing these goals is a reasonable formula for financial stability, he says. 

But despite the optimism about the American Dream, about half of the preretiree investors in the survey (47%) were either “extremely” or “somewhat” worried that they have not saved enough to be able to retire. Meanwhile, about a third (29%) were a “little worried,” while 24% were “not worried at all.”

Around 46% of all investors, including both the retired and non-retired respondents, were worried that they won’t have enough money to last throughout retirement. This includes 19% who were “extremely worried.” On the contrary, 20% were “a little worried,” and 29% were “not worried.”

“About half of investors worry about whether they’ll be able to retire, and if they do, whether they’ve saved enough to last through retirement,” Nadreau explains. “Regardless of where they are in their lives and how much they make, investors can allay these concerns with a clear saving-and-investment strategy.”

The index results also show most investors who own stocks are open to professional guidance, be it in person, on the phone, or collaboratively in the digital space. In fact, of the eight in 10 investors who reported owning individual stocks or mutual funds, 71% said they prefer consulting with someone who can give them expert or professional advice, compared to 27% who said they feel confident about
investing in the market on their own.

Overall, roughly one-third of investors (32%) sought more financial advice in the last two to three years, and nearly 40% indicate they would increase the advice they seek in the next two to three years.

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