Target-Maturity Fund Performance Climbs Back Up in 2009

At the end of 2008, Ibbotson Associates reported that among funds with at least one year of history, the average target-maturity fund lost 30.8% and all 264 funds lost money. Switching to 2009, the average target-maturity fund gained 27.1% and all of the now 322 funds made money.

The average target-maturity fund returned 4% during the fourth quarter, somewhat below the S&P 500 Index, which gained 6%. The weighted-average return of the 13 indexes that collectively form the Morningstar Lifetime Moderate Index family was 4.6%. For the year, the Morningstar Lifetime Moderate Index family gained 27.3% in 2009, while the S&P 500 Index gained 26.5%.

The average 2010 fund earned 3% for the fourth quarter and the average 2020 fund saw a 3.6%-gain, according to the report. The average 2030 fund posted a 4.2%-gain, while the average 2040 fund earned 4.5%. The average 2050 fund earned 4.7%.

All of the asset classes that typically make up target-maturity funds had positive returns, including cash that had a positive .04%-return. Ibbotson said that like last quarter, most of the fixed-income asset classes were slightly positive, while high-yield bonds produced equity-like returns of 6.2%, helping the performance of target-maturity funds that implement a portion of their fixed-income asset allocation with high yield.

Real estate, commodities, and emerging market stocks were the standout performers. Within U.S. equities, large-cap stocks beat small-cap stocks and growth stocks beat value stocks, reversing the dynamic of the previous quarter.

On an annual basis, all of the asset classes had positive returns. Within the fixed-income asset classes, inflation-linked bonds or TIPS significantly outperformed nominal investment-grade bonds. High-yield produced a return of 58.2%. Within equities, emerging markets returned 79%. Among U.S. equities, growth stocks significantly outperformed value stocks while large-cap stocks slightly outperformed small-cap stocks during the year.

Positive sentiment toward target-maturity funds strengthened during the fourth quarter, and estimated flows improved to almost $14 billion as compared to the third quarter’s $11 billion. Flows in each month of the fourth quarter were higher than any of the previous seven months. 2021 to 2025 funds stood out, with flow growth at 10% versus the third quarter’s 7% clip.

As a group, target-maturity funds enjoyed more than $45 billion in net flows for 2009, a modest increase over 2008’s $43 billion. Thanks to the stock market’s recovery as well as new investments, assets in target-maturity funds increased from $159 billion at the end of 2008 to $256 billion by the end of 2009.