Target-Date Funds Post Strong 3rd Quarter

Funds, designed for retirement accounts, posted second quarterly gain after six straight losses.

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Target-date funds continued to post stellar results in the third quarter, according to Ibbotson Associates, a unit of Morningstar. Among 319 funds in business at least a year, the average target maturity fund returned 14.3 percent during the quarter, compared with a 15.6 percent gain for the S&P 500 Index. Target-date funds are keyed to investors' planned retirement ages. Over time, they automatically adjust their mix of stocks, bonds, and other holdings to create a risk profile, or glide path, appropriate to an investor's changing age. The funds have become increasingly popular default options in many employers' 401(k) plans.

[See A New Role for Stocks in Retirement Funds?] Last quarter's performance followed a rise of 15.5 percent in the second quarter, compared with a 15.9 percent gain for the S&P 500. However, the funds had declined in the six previous quarters as part of the widespread meltdown of equity prices. Because the funds are designed for retirement accounts, their losses attracted many critics who said the funds should have been more conservatively managed. Last period's performance, Ibbotson noted in a report, contributed to a year-over-year gain for the average fund of slightly less than half a percent. The S&P 500, by contrast, was down nearly 7 percent during that period.

There are 12 existing maturity target years for the funds, created in five-year increments, and aimed at investors who turn 65 in or near a particular target year. The 2000 group of funds is the oldest and most conservatively invested, while the 2055 group is aimed at investors who are just beginning their working lives. The average quarterly gains for the funds closely tracked their maturity categories. The 2055 group of funds returned 17.5 percent, while the 2000 group earned 9.8 percent.

[See Target-Date Fund Expense Fees Vary Wildly.]

Funds designed for younger investors invest heavily in stocks and other higher-return asset classes. Although these holdings historically have outperformed other investments they carry more risk, as illustrated during the recent bear market. Ibbotson said the asset classes held by different funds reflected these differentials during the third quarter. Real estate holdings of target maturity funds topped the performance list by returning 33.3 percent during the period, Ibbotson said, followed by U.S. small-company value stocks (22.7%) and emerging market stocks (21 percent). By contract, U.S. short-term bonds returned 1.4 percent, Treasury Inflation Protected Securities (TIPS) 3.1 percent, and longer-term U.S. bonds 3.7 percent.

[See Target-Date Funds Finally Showing Solid Gains.]