Target-Date Funds End Losing Streak

July 14, 2009 (PLANSPONSOR.com) - The stock market rally that continued throughout the second quarter ended the string of six consecutive quarters in which the average target-date fund lost money, according to the Ibbotson Target Maturity Report Q2 2009.

The average target-date fund returned 15.5% during the second quarter, slightly below the S&P 500 Index, which gained 15.9%, the report says. The weighted-average return of the 13 indexes that collectively form the Moderate Morningstar Lifetime Allocation Index family was 15.3%.

Despite the recent gains, on a year-over-year basis, the average target maturity fund lost 20.7%, while the S&P 500 Index and the Moderate Morningstar Lifetime Allocation Index family lost 26.2% and 19.1%, respectively.

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The average 2010 fund gained 11.7%, according to Morningstar data, while gains increased to nearly 15% for the average 2020 fund and nearly 17% for the average 2030 fund. The average 2040 fund saw an 18% gain, and the average 2050 fund saw a 19% gain.

All of the asset classes that typically make up target maturity funds had positive returns, the data shows. Most of the fixed income asset classes were slightly positive; however, high yield bonds returned 23.1% besting many of the equity asset classes and helping the performance of target maturity funds that implement a portion of their fixed income asset allocation with high yield.

The equity asset classes were all sharply positive. Emerging market stocks (34.8%), non-U.S. developed stocks (25.9%), and real estate (28.8%) were the standout performers helping funds with higher than average exposures to these asset classes. Within U.S. equities, small-cap stocks outperformed large-cap stocks.

The recent streak of losses for target-date funds, along with concerns over glide path variations and participant misunderstandings about the funds, led to a joint hearing on the funds by the Securities and Exchange Commission and Department of Labor (see Target-Date Hearing Webcast Now Online ).

For the first time in its Target Maturity Report Q2 2009, Ibbotson reported target maturity fund flow data from Morningstar's Fund Flow database, which is available via Morningstar Direct.

According to the report, flows into target-date funds continued unabated despite poor 2008 performance and controversy around the appropriateness of their investment policies for their intended purposes. Flows amounted to over 6% of beginning assets under management for the quarter, versus 2.3% for all other open-end funds. Looking back to Q4 of 2008. target-date funds managed to pull in estimated net flows of $5 billion while the rest of the industry endured $181 billion in outflows.

align="left">Table 4: Target Maturity Fund Flows Q2 2009

align="left"> Asset Under Management

align="center"> (Mil$)

align="left">Target Date

align="center">End Q1

align="center">End Q2

align="center">Estimated Net

align="center">Average

align="center">Q2 Flow as a

align="center">Flow Q2

align="center">Quarterly Flow

align="center">% of beginning

align="center">(past four

align="center">AUM

align="center">qtrs.)

align="left">Income

align="center">7,532

align="center">8,400

align="center">283

align="center">140

align="center">4%

align="left">2000-2010

align="center">24,261

align="center">27,398

align="center">243

align="center">(224)

align="center">1%

align="left">2011-2015

align="center">20,279

align="center">23,891

align="center">1,041

align="center">880

align="center">5%

align="left">2016-2020

align="center">33,242

align="center">40,068

align="center">1,698

align="center">1,327

align="center">5%

align="left">2021-2025

align="center">19,004

align="center">23,475

align="center">1,476

align="center">1,359

align="center">8%

align="left">2026-2030

align="center">23,375

align="center">29,167

align="center">1,655

align="center">1,555

align="center">7%

align="left">2031-2035

align="center">11,827

align="center">15,130

align="center">1,191

align="center">1,160

align="center">10%

align="left">2036-2040

align="center">13,646

align="center">17,539

align="center">1,348

align="center">1,266

align="center">10%

align="left">2041-2045

align="center">4,808

align="center">6,356

align="center">674

align="center">634

align="center">14%

align="left">2050+

align="center">2,545

align="center">3,496

align="center">475

align="center">434

align="center">19%

align="left"> Totals

align="center">160,518

align="center">194,921

align="center">10,083

align="center">853

align="center">6%

align="left">Source: Morningstar Direct

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