With the market trepidation of the 1st quarter having quickly receded, the 2nd quarter was notable for its complete turnaround performance-wise. Equities climbed significantly higher, with some areas of the market surpassing recent highs from late March. Fixed income kept moving right along as interest rates stayed relatively flat during the quarter. So, how did Target Date Fund performance fare?
By Clayton Fresk on July 23, 2020
With the market trepidation of the 1st quarter having quickly receded, the 2nd quarter was notable for its complete turnaround performance-wise. Equities climbed significantly higher, with some areas of the market surpassing recent highs from late March. Fixed income kept moving right along as interest rates stayed relatively flat during the quarter. So, how did Target Date Fund (TDF) performance fare?
Here is the performance of all TDFs in the 1st quarter 2020, with the S&P Target Date Index being the thicker black line.
Chart Source: Stadion
As you can see, the longer dated TDF performance ranged in the -15% to -24% range, and the shortest dated/income funds ranging in the -2% to -11% range. This 9% range also held steady for most of the vintages in-between.
So, how did 2nd quarter performance compare?
Chart Source: Stadion
The longer-dated TDFs now had a range of about +13% to +21%, with shorter dated/income funds more in the +4% to +12% range. However, you can also see the spectrum of returns was not as tight as in the 1st quarter, with a bit more dispersion in returns particularly to the downside. Some explanations for this may include:
- Some funds have the ability to tactically adjust exposure within a preset boundary, and coming out of the 1st quarter selloff may have had reduced equity exposure
- Some funds have a volatility range that, when breached, caused a significant reduction in risk exposure
In each of these cases, managers were not able to react to the very rapid equity price appreciation during the 2nd quarter–which bounced off the quickest “bear market” in history during the first quarter– and, thus, may have been underexposed to equities during the rally.
Finally, here is a YTD 2020 chart:
Chart Source: Stadion
On a Year-to-Date (YTD) basis, the longer dated TDFs generally remained negative in the -2 to -10% range, with shorter dated/income funds in the +3% to -3% range. Additionally, some of the outliers (both to top and bottom side) are a bit easier to see on a YTD basis.
As always, the biggest driver of return dispersion is the amount of equity a TDF holds at a vintage. Further, the type of equity can be a determining factor as well. Some of the common factors include:
- US vs INTL exposure: TDFs with a higher skew toward US holdings generally would have fared better YTD, as US stocks (measured by the S&P 1500 index) are down about 4% vs down 11% for the MSCI ACWI ex US index.
- Market Cap exposure: TDFs with a higher skew toward large cap stocks generally would have fared better, as large cap stocks (measured by the S&P 500) are down about 3% YTD vs down 13% for the Russell 2000 and down 18% for the S&P 600
- Active vs Passive: TDFs utilizing active management in the equity holdings seem to be getting a bit of a tailwind on a YTD basis, with longer dated active TDFs (those holding more equity) outperforming their passive counterparts by about 1.4%. However, the reverse seems to be true for fixed income holdings, as on the shorter dated side (those holding more fixed income) active TDFs are trailing their passive counterparts by about 0.8%.
We’ve noted previously, and believe, that using short-term return periods to analyze an individual TDFs merit may not reveal as clear a picture as possible, particularly during such a dramatic down-and-up market we’ve seen so far this year. However, it can give interesting insights on the industry as a whole and the many differences within.
Author: Clayton FreskClayton 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.
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