Investing

Target Maturity Funds Have Tough Second Quarter

By PLANSPONSOR staff editors@plansponsor.com | July 26, 2012
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July 26, 2012 (PLANSPONSOR.com) - Global equity markets rallied in June, but second-quarter performance suffered as the global economic picture showed little signs of sustained improvement, a report found.

In the U.S., employment growth slowed, first-quarter gross domestic product was revised downward, and corporate profits fell during the first quarter of 2012 for the first time since the last quarter of 2008. Eurozone concerns lingered, particularly on worries around Greece and Spain. These events contributed to a tough quarter for target maturity funds, which have exposure to equity and fixed-income asset classes domestically and globally. Non-U.S. equity was the biggest drag on target maturity performance, according to Ibbotson Associates’ Target Maturity Report for the second quarter.

Some of the survey’s key findings for the quarter include:

The average loss for target maturity funds was 2.8%, nearly identical to the performance of the S&P 500 and almost five percentage points lower than the Barclays U.S. Aggregate Bond Index. The poor performance was driven by the dismal performance of non-U.S. equities, which lost almost 7%.

12-month performance dropped into negative territory with the average target maturity fund losing 0.5%. This was also driven by the underperformance of non-U.S. equities, which lost more than 13% over the period.

Despite the poor performance of global markets, assets continued to flow into target maturity funds with the help of auto-enrollment and auto-escalation features. At the end of the second quarter, total assets in target maturity funds reached $431 billion.

After the first quarter’s average return of nearly 9%, target maturity fund performance took a step back with the average target maturity fund losing 2.8% in the second quarter. For the 12-month period, the average return dropped into negative territory with a 0.5% loss.

More typical, Ibbotson said, is for the average target maturity performance to fall between that of the S&P 500 and the Barclays U.S. Aggregate Bond Index as the funds are made up of a mix of equities and fixed income. But over the past quarter and 12-month period, the returns of target maturity funds have been lower due to non-U.S. equity exposure. Over the past year both U.S. equities and fixed income had fairly strong returns with the S&P 500 rising 5.5% and the Barclays U.S. Aggregate Bond Index up 7.5%. But target maturity fund diversification into non-U.S. equities dragged performance down below those levels.