Target-Date Funds Display Wide Range of Equity Allocation

When looking at 2020 funds, the range of equity allocations spans from 51% to 95%, according to a study by Financial Research Corporation (FRC).

In a press release, FRC said its study, Future Outlook for Lifecycle Funds: Insights into Emerging Trends and Growth Opportunities, profiles 58 of the leading target-date and target-risk providers.

A majority of the firms (56%) use a tactical rebalancing approach (changes in allocations allowed within specified ranges), which keeps the target-date series on its glide path while still allowing for some flexibility to take advantage of market opportunities.

More than one-quarter (27%) of firms reviewed by FRC indicated that they offer exposure to at least one non-traditional asset class. That represents a large, disparate group of asset classes, including sectors (real estate, commodities), specialty fixed income (high yield, TIPS), regions (emerging markets), and hedged options (long/short, market neutral).

The FRC says most (60%) of target-date funds use a mainstream index as their primary benchmark. The most popular index is the S&P 500, with nearly three-quarters of firms that use a mainstream index selecting it as their primary benchmark.

The report also provides a peer group analysis through which like funds with similar allocations are ranked within a single target-date category. “FRC’s peer group analysis allows for an “apples-to-apples’ comparison of target-date funds based on current allocations,” said FRC study author Lynette DeWitt, in the release. “Using FRC’s methodology, advisers can add value by selecting the most appropriate allocation for an investor among the range of funds available.’

More information on this report is available here.