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4th Quarter and 2020 TDF Performance

We have emerged from a tumultuous 2020. Covid-19 took over our lives and, for many, livelihood. The election finally came and went. And after the newsworthy bear market in the 1st quarter, the stock market proved very resilient as it recovered this loss extremely quickly to close out the year at all-time highs. So how did all this noise affect Target Date Fund (TDF) performance?

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By Clayton Fresk on January 25, 2021



We have emerged from a tumultuous 2020.  Covid-19 took over our lives and, for many, livelihood.  The election finally came and went.  And after the newsworthy bear market in the 1st quarter, the stock market proved very resilient as it recovered this loss extremely quickly to close out the year at all-time highs.  So how did all this noise affect Target Date Fund (TDF) performance?


Investors farther from retirement (left side of the chart) had returns between 12-18%, while investors near or in retirement (right side of the chart) had returns in the 3-12% range.

 

So how did this affect the full-year 2020 returns after the terrible 1st quarter and strong subsequent quarters?  Here is the full-year chart:


Generally speaking, investors farther from retirement had returns in the 10-20% range and investors in or near retirement had returns in the 7-15% range.

 

We spoke about the terrible 1st quarter and strong subsequent quarters during 2020.  Here is a quarter by quarter and full year 2020 look at the S&P Target Date Index by vintage:


As you can see, the brutal 1st quarter was followed by a strong rebound in the 2nd quarter, a more subdued 3rd quarter, and then another very strong 4th quarter.  For 2020, the vintages returned between 14% for longer dated vintages to 10% for shorter dated.

 

As we have spoken to before, there are numerous factors that can affect the return of a TDF.  The biggest contributing factor is the amount of equity and fixed income a particular vintage holds.  This is easily seen looking at a vintage level, where vintages with more equity (i.e. 2060) outperformed vintages with less equity (i.e. 2020).  But digging into the underlying TDFs in a particular vintage can provide further clarity on the range of returns experienced in the overall industry.

 

Other factors that can contribute to performance differentials besides the amount of equity/fixed income held is the type of equity/fixed income held.  We have touched on some of these in the past, but here are some common contributing factors.

 

US vs International Exposure

 

The amount of US vs International exposure held within the equity sleeve was a large contributing factor in performance differentials in 2020.  While both markets had a rough 1st quarter, the US proved to be more resilient coming off the bottom.  Overall, for the year, US stocks (as measured by the MSCI USA IMI index) returned 21.0% vs International stocks (as measured by the MSCI World Ex-US IMI index) returned only 11.1%.  So, holding everything else equal, those TDFs with a higher home-country bias in their equity holdings would have had higher performance on the year.

 

Additionally, within International exposure, there was a decent divide between Developed and Emerging stock performance, with Developed (measured by MSCI EAFE Index) returning 7.8% vs MSCI Emerging Markets Index returning 18.3%.

 

Growth vs Value

 

The Growth vs Value trade saw massive dispersion in 2020, so those TDFs maintaining a growth skew in their holdings would have experienced a relative tailwind.  This held true in both large and small cap stocks:


Market Cap Exposure:

 

Another contributing factor is the Market Cap exposure of the equity holdings.  US large cap stocks outperformed US small cap stocks on the year, but the degree of outperformance varied depending on the index provider:


It should be noted that different index providers have different definitions for Large vs Small cap stocks.  However, for the most part the performance of the providers excluding the S&P where similar, with the S&P 600 trailing other small-cap indices by a decent margin.

 

Additionally, the reverse was true for International (Developed) Stocks.  The MSCI EAFE Large Cap Index returned 7.6% vs the MSCI EAFE Small Cap index returning 12.7%.  The MSCI Emerging Markets Index saw relatively equal performance in large vs small cap stocks.

 

Fixed Income

 

The driving force behind fixed income performance differentials in 2020 was the duration of the underlying holdings.  Interest rates declined drastically during the first quarter.  But unlike the rebound in stocks, interest rates remained lower during the remainder of the year.  As such, bond prices/returns went up drastically during the first quarter but did not give back said returns during the subsequent quarters.  Despite a bit of a steepener in the curve (where shorter dated interest rates declined more than longer dated rates), longer duration treasuries strongly outperformed:

1-3 Year: 1%

3-7 Year: 9%

7-10 Year: 9%

10-20 Year: 3%

20+ Year: 0%

 

As such, all else equal TDFs with longer-duration fixed holdings outperformed those with shorter durations.</P)

Quality of fixed income holdings did not have a performance effect this year, as spreads (the difference in rates between corporate bonds and treasuries bonds) widened during the first quarter but then tightened throughout the remainder of the year to close at nearly the same levels.  As such, corporate bonds generally performed inline with treasuries on the year.

 

As you can see, there are a myriad of factors that can explain performance differences between various target date funds.  And while these differences do not make one TDF better or worse than another, understanding the differences can help investors make educated decisions.

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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.

20204Q20Quarterly Wrap UpTarget Date FundTarget 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.


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.

The S&P target date indices aim to measure the performance of multi-asset portfolios that correspond to particular target retirement dates.

The MSCI USA Investable Market Index (IMI) is designed to measure the performance of the large, mid and small cap segments of the US market.

The MSCI World ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries, excluding the United States.

The S&P SmallCap 600® seeks to measure the small-cap segment of the U.S. equity market.

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.

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