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Winning The Target-Date Fund Battle
Target-date funds suffered a similar fate to other mutual fund classes in 2008. Supposedly constructed to reduce risk as investors got closer to their retirement date, many did far worse than anyone expected. For example, the Oppenheimer 2010 Transition (OTTAX) fund lost 41% last year, even though almost one-third of its portfolio was in bonds. Unfortunately, two-thirds of this was in mortgage-backed securities. Even more disturbing, the fund's equity holdings represented 65% of the portfolio. Whatever happened to the old rule of thumb, "100 minus age" when calculating equity composition? This clearly went out the window. In fact, investing in the fund companies might be more prudent than investing in the funds themselves.
IN PICTURES: Eight Ways To Survive A Market Downturn
Retirement Investing Made Easy
Target-date fund assets dropped 10% in 2008 from $183 billion to $164 billion. They are an extremely popular retirement planning tool. Some 87% of the $164 billion invested in life-cycle funds are held in retirement accounts. Why such a high number? They are easy to own. One decision and the fund companies do the rest. You can be certain these assets will grow in the years to come (as markets rise and new money flows in) and the fund companies will be the ones at the front of the gravy train, not their mutual fund clients. Therefore, why not invest directly with the winners of this little exercise. If you can't beat them, join them.
Top Five 2035 Target-Date Funds And Companies
Nowhere To Call Home
When you do a screen for target-date funds, you'll usually find them broken down into periods, five years being the most common. Unlike other categories, they aren't lumped into one big group. As a result, it is more difficult to determine who the leaders are. Let's look at the funds catering to people contemplating retirement in and around 2035. That's just over 25 years from now. Using a Morningstar screen, over 100 funds came up with a target-date of 2031 to 2035. There isn't actually that many; it just looks that way because of the various classes of shares available. The accurate number is more like 31.
It's worth noting the two top funds in this search, Vanguard Total Retirement 2035 (VTTHX) and Fidelity Freedom 2035 (FFTHX) combine for over $9 billion in terms of assets under management and both are private companies. The highest asset value from a publicly owned company is T. Rowe Price's Retirement 2035 (TRRJX) fund, with $1.7 billion under administration with the remaining four listed in the table above.
Who's Paid What
In terms of assets under administration, T. Rowe Price is the big winner here. None of the other company's funds even comes close. Because mutual fund companies receive a management fee based on assets, T. Rowe Price stands to gain the most financially. With $1.7 billion in 2035 target-date assets, it brings home approximately $13 million in fees while its nearest competitor, John Hancock, takes home just $1.8 million and that's with a higher management expense ratio (MER). Manulife management isn't going to miss the revenue but T. Rowe Price would. And so would AllianceBernstein. As for Wells Fargo, it's a rounding error for them.
The Bottom Line
A few wrinkles still need to be worked out with target-date funds, like appropriate regulations to reduce improper asset allocation of assets. Once this is accomplished, there's no reason why they can't become the biggest financial product since the introduction of mutual funds 75 years ago. If they do, T. Rowe Price seems ideally situated and thus is the best stock to buy of the bunch. (Learn more about target-date funds in our article: The Pros And Cons Of Life-Cycle Funds.)
IN PICTURES: Eight Ways To Survive A Market Downturn
Retirement Investing Made Easy
Target-date fund assets dropped 10% in 2008 from $183 billion to $164 billion. They are an extremely popular retirement planning tool. Some 87% of the $164 billion invested in life-cycle funds are held in retirement accounts. Why such a high number? They are easy to own. One decision and the fund companies do the rest. You can be certain these assets will grow in the years to come (as markets rise and new money flows in) and the fund companies will be the ones at the front of the gravy train, not their mutual fund clients. Therefore, why not invest directly with the winners of this little exercise. If you can't beat them, join them.
Top Five 2035 Target-Date Funds And Companies
|
Fund |
Assets |
Company |
Market Cap |
|
T. Rowe Price Retirement 2035 (TRRJX) |
$1.7B |
T. Rowe Price Group (Nasdaq:TROW) |
$11B |
|
John Hancock2 Lifecycle 2035 (JLHOX) |
$193M |
Manulife Financial (NYSE:MFC) |
$35B |
|
AllianceBernstein 2035 Retirement (LTKAX) |
$137M |
AllianceBernstein Holding (NYSE:AB) |
$1.9B |
|
Principal LifeTime 2035 (LTIUX) |
$132M |
Principal Financial Group (NYSE:PFG) |
$5.4B |
|
Wells Fargo Advantage 2035 (WFQWX) |
$39M |
Wells Fargo (NYSE:WFC) |
$104B |
Nowhere To Call Home
When you do a screen for target-date funds, you'll usually find them broken down into periods, five years being the most common. Unlike other categories, they aren't lumped into one big group. As a result, it is more difficult to determine who the leaders are. Let's look at the funds catering to people contemplating retirement in and around 2035. That's just over 25 years from now. Using a Morningstar screen, over 100 funds came up with a target-date of 2031 to 2035. There isn't actually that many; it just looks that way because of the various classes of shares available. The accurate number is more like 31.
It's worth noting the two top funds in this search, Vanguard Total Retirement 2035 (VTTHX) and Fidelity Freedom 2035 (FFTHX) combine for over $9 billion in terms of assets under management and both are private companies. The highest asset value from a publicly owned company is T. Rowe Price's Retirement 2035 (TRRJX) fund, with $1.7 billion under administration with the remaining four listed in the table above.
Who's Paid What
In terms of assets under administration, T. Rowe Price is the big winner here. None of the other company's funds even comes close. Because mutual fund companies receive a management fee based on assets, T. Rowe Price stands to gain the most financially. With $1.7 billion in 2035 target-date assets, it brings home approximately $13 million in fees while its nearest competitor, John Hancock, takes home just $1.8 million and that's with a higher management expense ratio (MER). Manulife management isn't going to miss the revenue but T. Rowe Price would. And so would AllianceBernstein. As for Wells Fargo, it's a rounding error for them.
The Bottom Line
A few wrinkles still need to be worked out with target-date funds, like appropriate regulations to reduce improper asset allocation of assets. Once this is accomplished, there's no reason why they can't become the biggest financial product since the introduction of mutual funds 75 years ago. If they do, T. Rowe Price seems ideally situated and thus is the best stock to buy of the bunch. (Learn more about target-date funds in our article: The Pros And Cons Of Life-Cycle Funds.)
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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