Target Maturity Funds Outperformed Indexes in Q4

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.  

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.