Target Maturity Funds Outperformed Indexes in Q4

Target maturity funds continue to see total assets climb to all-time highs.

According to the Ibbotson Target Maturity Report by Morningstar, as of the end of 2012, total assets in target maturity funds were nearly $485 billion, a 29% increase from a year ago. Nearly half of target-date fund (TDF) assets are in categories closer to retirement, spanning from 2016 to 2030 retirement date funds. However, the organic growth rate of funds furthest from retirement (2051+) are highest, as new workers are perhaps defaulted into their retirement plans’ target-date fund offering, the report said.  

During the fourth quarter, inflows continued with more than $13 billion entering target maturity funds during the period. Target maturity fund returns were muted but managed to outperform both the S&P 500 and Barclays U.S. Aggregate Bond indexes. The average target maturity fund returned 1.7% in the fourth quarter, whereas the S&P 500 Index lost 0.4% and the Barclays Aggregate Bond Index returned a negligible 0.2%. Fund returns were boosted by diversification into non-U.S. equities and, to a lesser extent, high-yield bonds, which outperformed U.S. equities and core bonds. For the year, the average target maturity fund returned an impressive 13.1%, thanks to double-digit U.S. equity returns in the first quarter of 2012.  

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Asset prices across most asset classes experienced significant gains in 2012, which supported the performance of target maturity funds. Among equity asset classes, non-U.S. equities made up ground relative to U.S. equities, resulting in every equity asset class returning between 14.6% and 19.7%. Value outperformed growth, while large-cap and small-cap stocks had similar overall performance. Non-U.S. developed and emerging market equities generated handsome gains, outperforming U.S. equity. This benefited target maturity funds with significant allocations to the asset classes, returning 17.9% and 18.6%, respectively. REITs were the best-performing asset class in 2012, gaining 19.7%. Due to its negative fourth quarter return, commodities was the sole negative performer with a loss of 1.1% for the year.     

Fixed income continued to boost performance of well-diversified target maturity portfolios. In particular, high-yield bonds posted strong gains of 15.8% in 2012, on par with many equity asset classes. Treasury inflation-protected securities (TIPS) outperformed aggregate bonds, while the performance of shorter-term bonds was a muted 1.3%.   

The quarterly target-date fund report includes a “Year in Review” section that looks at longer-term trends. The report is here.

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