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5 Year Target Date Performance – What’s Up?

While investors had a pretty easy ride heading into 2020, they definitely experienced some bumpiness during the tumultuous 1st quarter. Even with this horrible first quarter taken into account, though, most target date investors have still experienced positive performance over a longer-term five-year view. However, looking back over the past years also illustrates some odd anomalies in performance.

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By Clayton Fresk on May 4, 2020



While investors had a pretty easy ride heading into 2020, they definitely experienced some bumpiness during the tumultuous 1st quarter. Even with this horrible first quarter taken into account, though, most target date investors have still experienced positive performance over a longer-term five-year view. However, looking back over the past years also illustrates some odd anomalies in performance.

 

We’ve talked a lot about glide paths in this forum, which– at their most basic level – place investors with longer time horizons (years-to-retirement) onto paths with a higher allocation to equities, and investors with shorter time horizons onto ones less equity. As such, one would generally expect investors with more equity to have higher performance than those with lower equity given the higher allocation to riskier assets. Conversely, in bear markets when equities are selling off, those with longer time horizons will experience lower performance. And this isn’t necessarily a bad thing, as it’s presumed these investors can handle more volatility due to having more earning years ahead of them.

 

But what we’ve seen in the target date space over the trailing 5 years is a bit odd. The chart below is the S&P Target Date index performance, with the vintages along the x axis and annualized performance along the y axis.


Chart Source: Stadion

 

As we mentioned, one would expect higher returns in the longer dated vintages vs. their shorter-dated counterparts. However, as you can see each of the S&P vintages essentially has identical returns over the past 5 years, right around the +/- 3.1% range.

 

So, why would that be the case? In its most simple explanation, equities and fixed income had very similar returns over the past 5 years, so any combination of the two – no matter what the splits – would also provide similar returns.

 

Digging a bit deeper, it may seem equities had a better go of it based on common metric of the S&P 500. However, the equity portion of a target date’s allocation is not solely made up of the S&P 500 (large cap stocks). Here is a simple table showing trailing 5-year performance for the asset classes that make up the equity portion of the S&P Target Date Indices.

 


Chart Source: Stadion

 

So, while large-cap stocks returned about 6.7%, a broadly diversified equity portfolio returned closer to 3%.

 

For comparison, here is the fixed income breakdown.


Chart Source: Stadion

 

While also diversified, the degree to which it affected overall performance was much smaller, with the result still being around 3%.

 

While the S&P Target Date Index Series is the industry consensus benchmark, target date funds can have an array of performance. Here is the same chart as earlier with all target date funds added.

 


Chart Source: Stadion

 

As you can see, the S&P Target Date Index Series is right about in the middle, with some funds having better and some having worse performance.  However, the general slope of the industry is relatively flat, with all vintages having a similar performance range. So, if equity and fixed income generally performed the same, what would cause some funds to have better or worse performance?

 

We’ve talked about some of these in past posts, but they can come to light once again.

 

Examples can include:

  • US vs. INTL weighting: US has broadly outperformed, so those that have a higher weighting to US stocks over the past 5 years could have better performance
  • Market Cap Weighting: Large Cap has broadly outperformed, so these that have a higher weighting to large cap stocks over the past 5 years could have better performance
  • Other: there are many other factors that can come into play, such as growth vs. value allocation, factor exposure, active vs passive, duration exposure, etc.

 

This flat performance over the glide path may just be anomalous to this recent period and caused by the sharp 1Q selloff. Here is the same 5-year chart, but from the end of 2014 to end of 2019 (so pre-selloff).

 


Chart Source: Stadion

 

You can see the trajectory of performance is much more normalized (longer dated vintages having higher performance and vice versa).

 

Where does that leave us? Really, only time will tell!

 

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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.

AnalysisGlide PathS&P Target Date IndexTarget Date Funds
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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 S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500®, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

 

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The S&P Target Date Index Series is comprised of a set of weighted return indices, each aligned with specific target date years. Each index measures the performance of sub-indices selected and weighted to represent a consensus of the opportunity set available in the U.S. universe of target date funds.

 

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