The best-performing target-date mutual funds have outperformed the S&P 500 during the wild drop and quick recovery of the stock market this year.
While the market fell during the first quarter, many products designed for near-retirees limited losses, thanks to lower allocations to stocks than funds built for younger savers.
In some ways, this year’s volatility has been a test for individual products – whether, for example, they helped protect investors from negative returns or rewarded them with strong returns when the market started to bounce back.
On average, institutional shares of 2020-dated funds saw returns of -0.38% during the first six months of the year, an analysis of data from Morningstar Direct shows. During that time, the S&P 500 returned -3.37%. But the average among 2040-dated funds, which are designed for mid-career workers, was lower, at -4.45%.
In many cases, the funds that have come out the best so far this year are those that limited losses during the first quarter — even if such funds didn’t see double-digit returns in the second quarter. The top-performing 2020 fund, for example, was Dimensional Fund Advisors’ 2020 Target Date Retirement Income Fund, which had a year-to-date return of 5.48%, data from Morningstar Direct show. At the end of February, that fund allocated between 20% and 45% of its assets to equity funds and 55% to 80% to fixed income, according to the product’s prospectus. At its target date, when allocations are mostly held static, that fund is designed to invest between 15% and 25% in equity funds and 75% to 85% in fixed income.
Other 2020 funds from Manning & Napier, John Hancock, Voya Financial and AllianzGI were top performers.
Some 2040 funds outperformed the market. Manning & Napier’s Target 2040 Fund, for example, saw a net return year-to-date through June of 3.31%, according to the Morningstar data.
As of the end of June, that fund held about 73% of assets in stock funds, 23% in bond funds and 1% in cash, according to product literature. Its biggest holdings were in large-cap U.S. equity (48%), international equity (20%) and intermediate-term fixed income (19%).
Other funds in the 2040 vintage from American Funds, State Street, American Century and Columbia Threadneedle Investments outperformed peers, the data show.
John Hancock was among several firms with products among the top 10 performers in both the 2020 and 2040 categories.
That firm’s Multimanager Lifetime series allows portfolio managers to use some tactical rebalancing, and the funds were “positioned relatively neutral in terms of risk in the equity-fixed-income split, given the late-cycle nature” of the market heading into 2020, said Greg Frazier, senior manager, research analyst at John Hancock Investment Management. “Our team is probably a little more tactical than some out there.”
That series began to reallocate assets to equities and riskier fixed-income securities following the sell-off earlier this year, which helped give it a performance boost, Frazier said.
“It’s certainly been a difficult-to-challenging time period to manage any assets, but the team did a good job responding to the market environment and [was not] dissuaded to avert from their process,” he said. “This is the same process that we would use in any market environment.”
The firm’s Multi-Index Preservation series, whose 2020 and 2040 vintages performed well compared to peers, follows a “neutral” glide path, meaning that managers do not shift allocations in response to the market, according to fund documents. The 2020 fund in that series had a roughly 8% allocation to equity funds as of January, while the 2040 fund invested about 74% of assets in stock-heavy funds, according to the prospectuses.
Of the 2020 and 2040-dated funds examined by InvestmentNews, two firms had products in both categories ranking near the bottom by performance: Equitable Investment Management’s 1290 Funds and MassMutual.
Representatives from Equitable did not respond to a request for comment.
MassMutual’s RetireSMART by J.P. Morgan target-date fund has an investment philosophy that “seeks to help more people cross the investment finish line, and uses two decades of research along with behavioral data from millions of participants to make investment decisions,” Doug Steele, the firm’s head of investment management for workplace solutions, said in a statement.
“The use of diversifying asset classes designed to reduce risk was challenged in the first half of 2020, given extreme levels of market volatility,” Steele said. “We believe the investment philosophy designed to mitigate market, event, longevity, inflation and interest rate risks along with a dynamic risk management approach will help investors meet their retirement goals over the long term.”
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