Non-U.S. Equities Help Drive 2nd Quarter TDF Performance

Extending their first-quarter gains, target-date funds posted a return of 2.83% in the second quarter, with diversification to non-U.S. equities helping drive TDF performance, according to the Callan Target Date Index.

Updated quarterly, the Index is an equally weighted composite of 44 TDF series, including both mutual funds and collective trusts.

MSCI World ex USA Index helped lead the way in non-U.S. equities, returning 5.87%, the findings show. Domestic equity exposure also helped with TDF performance, with the S&P 500 Index gaining 3.09%. TDFs experienced a slight drag coming from Bond market exposure, as Bloomberg Barclays U.S. Aggregate Bond Index produced a 1.45% return.

The median equity exposure of equally-weighted TDF vintages is 60%, Callan further notes, with equity exposure ranges from as high as 68% (10th percentile) to as low as 51% (90th percentile). Like the first quarter, the average TDF had 26% of its equity exposure in non-U.S. developed markets during the accumulation phase (age 25-65 vintages).

Meanwhile, the median target date manager has fared even better, outpacing the Callan Target Date Index by six basis points for the second quarter and by 39 basis points for the trailing year, according to the report. Looking at the trailing five-year period, however, the returns of the median target date manager and the Callan Target Date Index are essentially equal, with a difference of one basis point.

The spread between the best and worst managers narrowed from the first quarter, with those in the 90th percentile gaining 2.11% and those in the 10th percentile returning 3.37%. Callan emphasizes that the spread was meaningful for the trailing year, with managers in the 90th percentile up 8.96% and those in the 10th percentile posting gains as high as 14.07%.

The report further explains that long-dated vintages with equity-heavy allocations benefited from continued growth in global stock markets, outperforming near-dated vintages heavy with fixed income for the quarter. Second quarter gains for the median 2050 TDF came in at 3.84% and 16.9% over the trailing year, while the median 2015 TDF gained 2.33% in the second quarter and was up 8.64% for the year.

Finally, the median TDF’s expense ratio is 0.46%, ranging from 0.76% in the 10th percentile to 0.10% in the 90th percentile, with much of the difference driven by active versus passive implementation of target date glide paths, Callan notes.

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