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3Q20 Target Date Performance

After a very rough 1st quarter and a very strong bounce-back during 2nd quarter, the 3rd quarter was a bit more normalized, albeit still relatively strong. Performance during 3Q20 was, across-the-board, positive and enjoyed the springboard of a strong July and August despite a bit of a pullback in September

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By Clayton Fresk on October 28, 2020



After a very rough 1st quarter and a very strong bounce-back during 2nd quarter, the 3rd quarter was a bit more normalized, albeit still relatively strong.  Performance during 3Q20 was, across-the-board, positive and enjoyed the springboard of a strong July and August despite a bit of a pullback in September

 

Chart Source: Stadion

 

Most of the longer-dated vintage performance was in the 5.5-8.5% range, with shorter-dated vintage performance in the 2-5% range.

 

Looking at a Year to Date (YTD) view, the 3rd quarter helped normalize performance, but there remain some outliers both outperforming and underperforming:

 


Chart Source: Stadion

 

Here, longer-dated vintages generally range in the -5 to +5% range, with shorter dated performance in the +2 to +5% range.

 

Performance differentials are the result of the proportional allocations  of equity and fixed income a manager uses at a particular vintage, but also the types of equity and fixed income being utilized.   While the investment levels of equity/fixed income being used is an easy analysis point to visualize, the types of equity/fixed income requires a deeper dive.

 

Looking at both a 3rd quarter and YTD view, here are some different types of equity and fixed income managers can allocate to:

US vs International

Grid Source: Stadion

 

On the quarter, developed ex-US markets (represented by MSCI EAFE in the table) was the laggard, trailing both MSCI US and MSCI Emerging Markets indices by about 5%.  On a YTD basis, the US continues to remain the strongest, with EAFE being the laggard and Emerging Markets falling in-between.  This weak performance in Developed Markets comes even with a boost from a weakening dollar, as local market returns are roughly 3% worse on a 3Q and YTD basis.  With this, managers with a higher home bias (higher US allocation) generally would outperform given equal amounts of equity.

 

Market Cap

Grid Source: Stadion
Data Source: Bloomberg

 

On the quarter, Large cap stocks continued to outperform, beating their mid and small cap counterparts by roughly 5%.  ON a YTD view, this spread widens dramatically, with large-cap stocks outperforming small-caps by over 20%.  Looking at different index providers, we can see a similar yet a bit less dramatic spread.  On a YTD basis, the Russell 1000 (large cap) is beating the Russell 2000 (small cap) by 15%, vs the +20% differential in the S&P 500 vs S&P 600.

 

Style

Grid Source: Stadion

 

The Growth vs Value spread continued to widen during the 3rd quarter, with a bit more dispersion in large caps vs small caps.  On a YTD basis, the spread is very dramatic, with large-cap growth outperforming large-cap value by about 35%, with this dispersion on the small-cap side being closer to 25%.  While not shown in the table, this trend holds true in the International space as well, with EAFE Growth outperforming EAFE Value by about 23% YTD.  This would provide a strong tailwind to managers who have a growth skew in their equity holdings.

 

Fixed Income

Grid Source: Stadion
All Fixed Income Indices: Bloomberg Barclays

 

While there are other ways to slice-and-dice the fixed income space, here are a couple high-level comparison points in duration and quality.  For the 3rd quarter, the leader was Corporate High Yield (HY), which makes sense given the rally in risk assets and HYs higher correlation to equities.  The dispersion is easier to see on a YTD view, where HY remains the laggard, trailing the US Aggregate by about 6%.  This is where the duration differentials can also be seen, where the US Long Aggregate (10+ year) is outperforming the US Short Aggregate (1-5 year) by over 10%.  This would be a tailwind for managers who have a longer duration profile in their fixed income holdings.

 

Active vs Passive

Grid Source: Stadion
Data Source: Morningstar

 

Here we took a sampling of four broad-based mutual fund categories and took the average performance of the passive and active funds underneath, looking at YTD performance only.  This is to give a general idea of how active managers are performing on a YTD basis.  It might be a bit surprising that the largest spread is in Large Cap stocks, where active managers have underperformed by roughly 3%.  The Small Cap category has seen a spread closer to 1.5% favoring passive, whereas there is a negligible difference in Developed Market and Core Bond performance.  Again, these are very broad-based views on the active vs passive and there are numerous variables that can contribute to the differentials.

 

Going forward, the 4th quarter is primed for potential fireworks in the market, with the main catalyst being the forthcoming election.  Some of these differentials can turn on a dime depending on the outcome.  So, like we said, it’s difficult to make an investment decision on such a short timeframe, but we hope this reporting on the specificities that cause differing performance in different TDFs is informative.

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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.

3Q20AnalysisTDFTDFs
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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.


The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.

 

The S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

 

The S&P SmallCap 600 seeks to measure the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.

 

The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

 

The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

 

The Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.

 

The Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

 

The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented

 

The Barclays U.S. Corporate High Yield Bond Index is a total return performance benchmark for fixed income securities having a maximum quality rating of Ba1 (as determined by Moody’s Investors Service). Unlike the Fund, the Barclays U.S. Corporate High Yield Bond Index is unmanaged, is not available for investment and does not incur expenses.

 

The Bloomberg Barclays US Corporate Bond 1-5 Year Index measures the investment grade, fixed-rate, taxable corporate bond market with 1-5 year maturities.

 

The Bloomberg Barclays US Corporate Bond 10+  Year Index measures the investment grade, fixed-rate, taxable corporate bond market with 10 or more years until maturity.

 

Large-blend portfolios are fairly representative of the overall U.S. stock market in size, growth rates, and price. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large-cap.

 

Small-blend portfolios favor U.S. firms at the smaller end of the market-capitalization range. Some aim to own an array of value and growth stocks while others employ a discipline that leads to holdings with valuations and growth rates close to the small-cap averages. Stocks in the bottom 10% of the capitalization of the U.S. equity market are defined as small-cap. The blend style is assigned to portfolios where neither growth nor value characteristics predominate.

 

Foreign large-blend portfolios invest in a variety of big international stocks. Most of these portfolios divide their assets among a dozen or more developed markets, including Japan, Britain, France, and Germany. These portfolios primarily invest in stocks that have market caps in the top 70% of each economically integrated market (such as Europe or Asia ex-Japan). The blend style is assigned to portfolios where neither growth nor value characteristics predominate. These portfolios typically will have less than 20% of assets invested in U.S. stocks.

 

Intermediate-term core bond portfolios invest primarily in investment-grade U.S. fixed-income issues including government, corporate, and securitized debt, and hold less than 5% in below-investment-grade exposures. Their durations (a measure of interest-rate sensitivity) typically range between 75% and 125% of the three-year average of the effective duration of the Morningstar Core Bond Index.

 

The MSCI USA Index is designed to measure the performance of the large and mid-cap segments of the US market. With 619 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US.

 

The MSCI Emerging Markets Net Total Return Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

 

The MSCI EAFE Index (Europe, Australasia, Far East) is an unmanaged free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.

 

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