A Morningstar report said nearly all mainstream asset classes had a positive return during the first quarter of 2010 and the past 12 months. The 3.8% average target-maturity fund return in the first quarter was slightly below the 4% return during the fourth quarter of 2009.
As is consistent with previous up markets, this return trailed the 5.4% return of the S&P 500 Index. The weighted-average return of the 13 indexes that collectively form the Morningstar Lifetime Moderate Index family was 3.4%.
The aggregate stock-bond split was the primary driver of total returns for most funds. Relative return differences among funds with similar aggregate stock-bond splits are caused by detailed asset allocation differences and manager-specific performance.
Relative to the Morningstar Lifetime Moderate Index family, 238 funds outperformed while 94 funds underperformed.
Morningstar said that in continuing the theme of the last three quarters of 2009, nearly all of the asset classes had a positive return, including cash which was slightly positive. REITs and U.S. small-cap value stocks were the big winners of the quarter, both providing double-digit returns.
Non-U.S. equities continued to see slowing momentum as they significantly underperformed their U.S. counterparts during the quarter. Within the U.S. equity asset classes, value stocks outperformed growth stocks and small cap stocks outperformed large cap stocks, both of which are in line with long-term historical trends.
Morningstar said commodities was the biggest underachiever during the quarter, with a 5% decline after returning more than 10% during the second half of 2009. Within fixed income, as long-term investors would expect, high-yield bonds returned more than investment grade bonds, and longer term bonds outperformed shorter term bonds.
As is similar with the quarterly return data provided for the last 12 months, U.S. value stocks outperformed U.S. growth stocks, and U.S. small-cap stocks outperformed U.S. large-cap stocks. Within fixed income, high-yield bonds were the top performer beating the returns of many equity asset classes. Additionally, longer-term bonds returned more than shorter-term bonds over the period and large exposures to REITs and high yield bonds performed the best.
TD Fund Flows
Overall target-maturity flows increased 11% from the fourth quarter 2009, and were 55%higher than the flows of the first quarter 2009. The flow of money coming into these funds may be attributable not only to increased investor confidence in the markets, but to the increasing popularity of target maturity options within defined contribution plans, Morningstar said.
As measured by flow as a percentage of beginning AUM, the growth rates this quarter are similar to last quarter’s flows and those of other recent quarters. This product category’s ability to maintain its stellar quarterly growth rate is all the more impressive considering assets have climbed steeply in each successive quarter since first quarter of 2009 due to both flows and market appreciation.
Longer-dated target-maturity funds continue to receive the greatest percent increase of total assets, but all target maturity categories enjoyed more positive flows this quarter than last.
According to Morningstar analysts, if target maturity were a single Morningstar category, it would rank as the seventh largest. It’s already bigger than the World Stock and World Allocation categories, but it is still about $100 billion smaller than the Moderate Allocation category. Market appreciation aside, if target-maturity funds maintain their current growth rates they could collectively surpass $350 billion in assets within a year.
Morningstar said it is now tracking 332 unique target maturity funds with at least a one-year track record representing 43 fund families.