Target-date funds lost ground last year for the first time since 2008, but the performance gap has narrowed considerably since then, according to a new report.
In its first annual loss since 2008, the Callan Target-Date Index posted a 2015 return of -0.86%. However, the range of target-date fund performance has narrowed considerably when compared to 2008, as well. That year the range between best- and worst-performing TDFs (as measured by the 10th and 90th percentiles) was more than 22 percentage points. Last year the gap between the best and worst performers was fewer than two percentage points.
The downturn came as several large TDF managers reported increasing their glidepath allocation to equities over the past several years, according to Lori Lucas, head of Callan's Defined Contribution practice. “After the carnage of 2008, when the median target-date fund lost 26.41%, target-date fund managers generally decreased their glidepath allocations to equities and improved their overall diversification,” Lucas said.
On the aggregate (equal weighting all providers) Callan noted an increase in equity exposure along glidepaths in 2015. With total returns on broad-based indices either flat (1.3% for the S&P) or down (-4.4% for the Russell 2000 Small Cap and -5.25% for the MSCI ACWI Non-U.S.), the increase in equity weighed on many TDF providers. Many providers simultaneously increased the share of international equity within their equity allocation, which in many cases also hurt performance, according to Callan.
International equity (as measured by ACWI Ex-U.S.) trailed both the S&P 500 and the Russell 2000 during that period.
TDFs fared better in Q4, returning 3.01% as measured by the Callan Target-Date Index. Target date funds benefited primarily from domestic equity exposure during the quarter, with the S&P 500 gaining 7.04%. Though the domestic stock market enjoyed strong performance, bonds declined -0.57% as measured by the Barclays U.S. Aggregate Index.
The Callan Target-Date Index is an equally weighted composite of 44 TDF series, including both mutual funds and collective trusts. It is updated quarterly.
