Target-Date Funds End Losing Streak

The stock market rally that continued throughout the second quarter ended the string of six consecutive quarters in which the average target-date fund lost money, according to the Ibbotson Target Maturity Report Q2 2009.

The average target-date fund returned 15.5% during the second quarter, slightly below the S&P 500 Index, which gained 15.9%, the report says. The weighted-average return of the 13 indexes that collectively form the Moderate Morningstar Lifetime Allocation Index family was 15.3%.

Despite the recent gains, on a year-over-year basis, the average target maturity fund lost 20.7%, while the S&P 500 Index and the Moderate Morningstar Lifetime Allocation Index family lost 26.2% and 19.1%, respectively.

The average 2010 fund gained 11.7%, according to Morningstar data, while gains increased to nearly 15% for the average 2020 fund and nearly 17% for the average 2030 fund. The average 2040 fund saw an 18% gain, and the average 2050 fund saw a 19% gain.

All of the asset classes that typically make up target maturity funds had positive returns, the data show. Most of the fixed-income asset classes were slightly positive; however, high-yield bonds returned 23.1%, besting many of the equity asset classes and helping the performance of target maturity funds that implement a portion of their fixed-income asset allocation with high yield.

The equity asset classes were all sharply positive. Emerging market stocks (34.8%), non-U.S. developed stocks (25.9%), and real estate (28.8%) were the standout performers helping funds with higher than average exposures to these asset classes. Within U.S. equities, small-cap stocks outperformed large-cap stocks.

The recent streak of losses for target-date funds, along with concerns over glide path variations and participant misunderstandings about the funds, led to a joint hearing on the funds by the Securities and Exchange Commission and Department of Labor (see “More Details Released about Target-Date Hearing“).

Target Maturity Fund Flows

For the first time in its Target Maturity Report Q2 2009, Ibbotson reported target maturity fund flow data from Morningstar’s Fund Flow database, which is available via Morningstar Direct.

According to the report, flows into target-date funds continued unabated despite poor 2008 performance and controversy around the appropriateness of their investment policies for their intended purposes. Flows amounted to over 6% of beginning assets under management for the quarter, versus 2.3% for all other open-end funds. Looking back to Q4 of 2008. target-date funds managed to pull in estimated net flows of $5 billion while the rest of the industry endured $181 billion in outflows.