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3rd Quarter TDF Performance Overview

While we believe individual TDF performance should not be analyzed on a quarter-by-quarter basis, regular examination of the industry as a whole can reveal general themes and interesting nuances.

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By Clayton Fresk on November 1, 2019



While we believe individual TDF performance should not be analyzed on a quarter-by-quarter basis, regular examination of the industry as a whole can reveal general themes and interesting nuances.

 

At its most basic, a target date fund is simply a mix of equity and fixed income exposure, although some issuers take on other exposures as well such as real estate. This mix of exposures becomes more conservative— i.e. less equity, more fixed income—as an investor moves closer to retirement. Generally speaking, TDF vintages farther from their stated target date should take on more risk through higher equity exposure and, hopefully, enjoy higher performance.

 

However, when looking at shorter time periods, that may not always be the case. The 3rd of 2019 quarter was a good example. At the broadest level, fixed income investments outperformed equity investments, albeit by a small amount.

 

A visual example can be seen by plotting the performance of the S&P Target Date Index by vintage. The vintages are along the horizontal axis, and quarterly performance is along the vertical axis.

 

 

Normally, this chart would look similar to a glidepath chart with a downward left-to-right slope. However, in 3Q19 it is upward sloping due to those vintages with more equity having lower performance. We should also note the small dispersion of performance, with all the index vintages having performance within a 1% range.

 

From here, we can add in the numerous other TDFs onto that same chart to show how industry performance dispersed (with the same S&P line in black).

 

The industry has a  large dispersion of performance, with overall performance in the-2% to +3% range. You can also see a clustering of performance around the index, which is by design.

 

You may ask what would cause this amount of discrepancy? There are a couple of issues which may affect performance in both the short and long term. These are:

 

  • Percentage of equity/fixed income in a vintage. While the index attempts to measure the median amount of equity at a certain vintage, each issuer determines what they feel is the appropriate amount to allocate to. For example, the 2030 vintage above can have anywhere from 41% to 77% allocated to equities. This dispersion in exposure has a drastic affect on an individual fund’s performance.
  • Make-up of equity/fixed income exposure. While an issuer can determine what amount of equity and fixed income to use, they can also determine what types of exposure to use. This can also influence performance.  Just a sampling of the differences can include:

 

  • Allocating to more or less U.S. vs. International equity exposure
  • Allocating to more or less Large Cap vs. Small Cap exposure
  • Allocating to Passive vs. Active funds

 

Luckily, these decisions are made by the TDF issuer and not by the end investor. However, it is important to understand how these differences can affect performance, in terms of both risk and return, in the short-term and long-term.

 

 

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Author: Clayton Fresk

Clayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.

3Q19Asset AllocationS&P Target Date IndexTarget Date FundsTDFs
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Written By:

Clayton Fresk

Clayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.


There is no guarantee of the future performance of any Stadion account. Material has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Results based on available universe of Target Date Fund Series, which includes registered mutual funds, and non-registered collective investment funds and insurance accounts. Collective investment funds and insurance accounts are only available for investment to qualified retirement plan assets such as 401(k) plans.

 

The commentary, analysis and opinions expressed are those of Stadion’s investment Team. The commentary, analysis and opinions referenced are as of the date of publication and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice. This is not a recommendation to buy or sell a particular security. The investment strategy or strategies discussed may not be suitable for all investors.

 

Investors must make their own decisions based on their specific investment objectives and financial circumstances. Stadion Money Management, LLC (“Stadion”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Stadion’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.

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