The Bloomberg story said that while John
Hancock’s Lifecycle 2010 mutual fund is marketed as an investment that “becomes
more conservative” for people approaching retirement age, 35% of the fund’s
debt holdings in September were high-yield corporate bonds,
according to Morningstar Inc.
For example,
according to Bloomberg, the Hancock fund’s holdings include bonds that financed
construction of a New Mexico casino hotel, Inn of the Mountain Gods, that was
in default as of December 15. The U.S. default rate on high-risk, high-yield
bonds was 11.28% in November, according to Standard & Poor’s.
A single bond in
default is “not going to make or break the fund” because it’s a very small
portion of the thousands of bonds in the fund, Bob Boyda, senior vice president
in the investment management services division of John Hancock told Bloomberg.
“Even if a bond is in default it may have tremendous value.”
The problem,
according to Laura Pavlenko Lutton, editorial director in Morningstar’s
mutual-fund research group: target-date funds may present greater risks than
consumers have been aware, Bloomberg reported. The
target-date funds blossomed into a
$311-billion business by 2008, a year after the U.S. Department of Labor said
employers may use them as an auto-enrollment investment option for 401(k) plans.
Junk Bond Amounts
Other 2010
retirement funds with bonds rated below investment grade include: Principal
Funds LifeTime 2010 Fund, at 21% of its total debt holdings; the Fidelity
Freedom 2010 at 17.1%; T Rowe Price’s Retirement 2010 Fund at 13.1%; American
Funds’ American 2010 Target Date Retirement Fund at 11.4 %; and TIAA-CREF’s
Lifecycle 2010 Fund at 6.6%, as of the latest portfolio disclosure, according to
Morningstar.
Jonathan Shelon, manager
of Fidelity Investments’ Freedom Funds, told Bloomberg that risk is only one of
the concerns that someone who’s about to retire needs to consider. They
also need to generate enough income to last during their retirement years, he
said.
Meanwhile, Principal
Financial Group and TIAA-CREF said their allocation in high-yield bonds also
offers diversification, according to spokeswomen for the companies.
Bloomberg said three
of the nine largest target-date fund companies don’t have any junk bonds in
their 2010 or 2015 target-date funds: Vanguard Group, Wells Fargo & Co., and
ING Groep NV. Their overall bond holdings range from 35% in ING’s fund to 65% in
Wells Fargo’s fund.
Vanguard Group’s avoidance
of high-yield bonds is “very conscious,” said John Ameriks, head of the
company’s investment counseling and research group. Junk bonds wouldn’t add
“significant diversification,” and would raise expenses, he said.