Retirement target-date funds stung by emerging markets, U.S. bonds

BOSTON (Reuters) – The largest target-date funds for U.S. investors nearing retirement are reporting their worst performance since 2008, as bets on Chinese stocks and Treasuries produced negative returns.

Target-date 2020 funds run by American Funds, Fidelity Investments, T. Rowe Price Group Inc and Vanguard Group are all in the red amid this week’s stock market rout. The group accounts for about three-quarters of the $164 billion invested in 2020 funds, according to Morningstar Inc.

The Fidelity Freedom 2020 Fund is down 1.89 percent year to date, the biggest decline among the four. Retail 2020 funds run by T. Rowe and Vanguard each are down 1.5 percent while American’s fund has fallen 1 percent.

Six percent of Fidelity’s 2020 fund is invested in an emerging markets stock fund, whose value has fallen 18 percent this year. And its 5 percent stake in a long-term U.S. Treasury bond index fund is down 7.5 percent, hurt by rising rates.

Morningstar’s Moderate Target Risk benchmark is down 2 percent. It has had one down year (minus 1.79 percent in 2015) since the 2008 financial crisis, when it fell 22 percent that year.

Target-date funds are popular in 401(k) plans because they do the work of allocating worker and employer retirement contributions into stocks and bonds. Funds with distant retirement dates typically allocate about 90 percent of their portfolios to stocks, with that percentage declining as retirement nears.

“The target date series is built for the unengaged investor,” said Jacob Gerber, an investment specialist at Capital Group, the Los Angeles-based parent of American Funds.

Investors nearing retirement, he said, pay more attention to their target-date funds, concerned they could potentially run out of money before they die.

That’s one reason why capital preservation is not yet the primary focus for managers running 2020 funds.

The T. Rowe Price Retirement 2020 Fund, for example, has 56 percent of its $21 billion in assets invested in domestic and international stocks, according to fund disclosures. That allocation has paid off for investors, generating a 10-year annualized return of 10.22 percent.

The Fidelity fund’s annualized 10-year return of 8.7 percent lags that of its big rivals but is better than 65 percent of peers, according to Morningstar.

American Funds, meanwhile, has slashed its exposure to stocks in its 2020 portfolio to 47 percent, from 75 percent just five years ago.

Many target-date funds give their portfolio managers discretion to change pre-set allocation schedules if they see a turn in the market. The moves can amplify returns and risk.

The stock allocation in T. Rowe target date funds, for example, is about 3 percentage points below the pre-set level, said Joe Martel, a T. Rowe Price portfolio specialist. Morningstar’s Moderate Target Risk benchmark allocates 60 percent to stocks.

To be sure, significant risk remains in 2020 portfolios.

“We strive to balance the need for capital appreciation in the working years with the need for capital preservation and retirement income after the target retirement date,” Fidelity spokesman Adam Banker said.

“You can accept volatility as an accumulator,” Gerber said. “But it is not your friend as you approach retirement.”

Reporting By Tim McLaughlin; Editing by Steve Orlofsky

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