Target date funds on a tear

Funds also saw higher flows due to investors' improving confidence in the market, and target-date funds' popularity as a qualified default investment option in 401(k) plans
MAR 21, 2010
Target date funds posted their fourth consecutive quarter of positive returns in the first quarter, while flows into the investments surged, according to data from Ibbotson Associates. The average target date fund in Ibbotson’s universe of 332 funds with at least a one-year track record was up 3.8% for the first quarter, and 42.6% over the 12-month period. That compares with an average return for the 13 indexes in the Morningstar Lifetime Moderate Index Family of 3.4% for the quarter, and 42.5% over the past year. Climbing markets and gains in most asset classes helped bolster performance among target date funds, said Tom Idzorek, chief investment officer and director of research at Ibbotson. Top performers in the first quarter include U.S. small-cap-value equity and real estate, with each yielding a 10% return. Cash remained flat, while commodities posted an average return of -5%. Still, that hasn’t stopped some fund companies from turning to commodities in their target date funds. “Those fund managers might be contrarians: They’re not chasing returns, but going to a less popular area,” Mr. Idzorek said. “But the biggest reason I suspect they’re adding commodities is due to the widely held belief among the general public that inflation looms around the corner.” Commodities can be lumped in with real estate or Treasury inflation-protected securities as a short-term inflation hedge, he added. Among fixed-income categories, high-yield bonds carried the day with a 4.6% return in the first quarter, according to the Ibbotson report. Over the past 12 months, real estate was the big winner, reaping 106.7% in returns, followed by emerging-markets equity, which brought in 81.6%. At the same time, assets poured into target date funds, which rose 11% in the first quarter of 2010, compared to the previous quarter, and increased 55% over the year-ago period. At the end of the first quarter, assets under management were $282.3 billion, up from $256.5 billion at the end of 2009. Ibbotson attributes the higher flow to investors’ improving confidence and the fact that target date funds are a qualified default investment option in 401(k) plans. Many employers are also reinstating matches retirement plan contribution plans, further boosting assets in the funds.

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