Investors seeking peace of mind from target-date funds for their retirement planning may find the biggest risk lies in choosing the money manager.
American Century Investments’ group of target-date funds, which have a lighter allocation to stocks relative to peers, had the best performance among large providers after adjusting for price swings in the three years ended Dec. 31, according to the BLOOMBERG RISKLESS RETURN RANKING. The firm’s funds topped five of eight categories grouped by retirement date, or vintage. AllianceBernstein LP (AB)’s more-aggressive funds were last in all but one group.
Target-date funds are designed to reduce the level of risk as the investor gets closer to a chosen retirement date. While as a group the funds have succeeded in becoming more conservative as clients age, specific fund families such as American Century and AllianceBernstein go about investing in very different ways, meaning the manager selection can have a greater impact on risk-adjusted performance than the vintage.
“Investors should assume these funds are not created equally,” Josh Charlson, a senior fund analyst in Chicago at research firm Morningstar Inc. (MORN), said in a telephone interview. “There are a lot of differences in their asset allocation, especially around the point of retirement.”
The Riskless Return ranking included funds from the 20 largest target-date providers linked to retirement years ranging from 2015 to 2050. Consistent with holding riskier assets, average volatility of the funds increased with the target date, as did returns before adjusting for price swings. The only exception was the vintage of 2050, where total returns on average were lower than for funds targeting a 2045 retirement.
Target-date vehicles, multiasset mutual funds that trim stocks and increase fixed income at a preset rate as a holder ages, have almost tripled in five years to $460 billion in U.S. assets, according to the Investment Company Institute. They promise a no-fuss way to keep savings appropriately invested for decades. The biggest providers include Boston-based Fidelity Investments and Valley Forge, Pennsylvania-based Vanguard Group Inc.
Investors rewarded Kansas City, Missouri-based American Century’s Livestrong series with $3.2 billion in target-date deposits in the past three years, lifting assets to $6.3 billion as of the end of November, according to Morningstar. That’s the fourth-highest growth rate among large providers based on assets at the start of the period. New York-based JPMorgan Chase & Co. (JPM) had the strongest rate of growth and Fidelity had the most assets as of Nov. 30, with $155 billion.
AllianceBernstein, based in New York, lost $953 million to net withdrawals from its target-date series in that time, more than any other firm.
Risk and return patterns in the past three years represent an “anomaly” as stocks outperformed bonds by a relatively modest margin in historical terms, Christopher Nikolich, head of research for AllianceBernstein’s defined-contribution team, said in an interview. Three years isn’t enough time to fairly measure performance, he said.
“We design these funds for participants in what will be a very long investing cycle -- 20 or 30 years,” Nikolich said. “What’s going to drive success will be their wealth accumulation over that period, not a short-term risk-adjusted return measure.”
Target-date funds first appeared in 1993, and didn’t breach $100 billion in assets until 2006. AllianceBernstein opened its first target-date funds in 2005.
Measuring performance over five years would have eliminated 45 funds opened between Jan. 1, 2008, and Dec. 31, 2009, or more than a quarter of those examined in the rankings.
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, and gives a measure of performance per unit of risk. Higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
American Century’s risk-adjusted returns ranged from 2.7 percent for its Livestrong 2015 fund to 1.9 percent for the 2050 version.
American Century’s funds keep a more conservative mix of assets than rivals for most of their lives, as measured by allocation to stocks, Richard Weiss, senior portfolio manager at the firm, said in an interview. Holding less in stocks makes a fund less volatile.
The MSCI ACWI Index of global stocks was 3.6 times as volatile as the Barclays Global Aggregate Bond Index over the past three years, according to data compiled by Bloomberg.
American Century’s 2050 fund had 85 percent in equities, compared with 95 percent for AllianceBernstein and an industry average of 91 percent, according to a Sept. 30 report from Morningstar. The firm’s 2015 fund had 50 percent in stocks, versus 72 percent for AllianceBernstein and 52 percent for the industry.
American Century’s equity allocation doesn’t drop lower than 45 percent, a level it reaches within about two years after the target date. Many competitors reduce the number of stocks over a period of 10 years or longer past the point clients enter retirement.
“We have a relatively flat glide path and that’s by design,” Weiss said, using the industry’s term for the declining level of equities over the life of a fund.
“The overall effect of American Century’s approach is one of moderation, in line with management’s goal of reducing the risk of shocks,” Charlson wrote in Morningstar’s report.
A flatter glide path reduces an investor’s reliance on the favorable timing of stock-market gains.
“If you’re always 50-50 stocks and bonds, you don’t care whether the bull market is early or late,” Weiss said. “If you go from 100-0 to 0-100, you really need the bull markets up front.”
Weiss cautioned against using only equity allocation as a proxy for risk. Over time, his funds also shift their stock investments out of companies expected to increase profits and into those whose shares are seen as undervalued. Emerging-market stocks, high-yield bonds and real estate investment trusts also give way to domestic stocks, investment-grade bonds and inflation-protected Treasuries.
That, he said, has helped the Livestrong series curb volatility across vintages and garner above-average returns.
Cumulative total returns for the firm’s funds over the past three years ranged from 26 percent for the 2015 fund to 31 percent for the 2050 version. Average returns in those vintages were 24 percent and 27 percent, respectively, according to data compiled by Bloomberg. American Century was among the three lowest funds for volatility in all target years.
MSCI’s global stock index returned 23 percent over the period, and the Barclays Global Aggregate Bond index returned 16 percent, all before adjusting for volatility.
American Century contributes to Livestrong Foundation, the nonprofit organization founded by Lance Armstrong, and has an agreement in place for the use of its name. American Century, which never sponsored Armstrong directly, said in August it would continue its connection to and support of the foundation, which raises money to fight cancer. Armstrong had his seven Tour de France cycling championships stripped last year for using performance-enhancing drugs. American Century’s founder, Jim Stowers, and his wife, Virginia, are both cancer survivors.
American Century’s returns also benefit from low fees. The funds carry an annual expense ratio of 0.67 percent for shares investors can buy through a 401(k) retirement plan, compared with the industry’s 0.79 percent average, according to Morningstar. AllianceBernstein’s funds had an average annual expense ratio of 0.96 percent for similar shares.
American Century’s safest fund, its 2015 vintage, had a higher total return than even the riskiest funds offered by four competitors in the 2050 vintage, including those from AllianceBernstein and Fidelity.
AllianceBernstein, whose funds held above-average stock allocations in every vintage, had the lowest total returns over three years, except among the 2015 group, where Massachusetts Mutual Life Insurance Co.’s fund trailed. Returns of AllianceBernstein’s funds ranged from 18 percent to 21 percent, with volatility above par in each target year.
The funds did better in 2009, as the global economy rebounded. AllianceBernstein Retirement Strategy 2015 surged 31 percent that year, before adjusting for price swings, while Livestrong 2015 returned 18 percent.
The American Century funds are likely to look good in the long haul even if they trail peers in equity bull markets, said Morningstar’s Charlson.
“It’s a well-designed series that’s done well in different types of markets,” he said. “They might lag in a very frothy market when lower-rated bonds and lower-quality stocks are doing well, but that wouldn’t affect them terribly on a risk-adjusted basis.”
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