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LIPPER AWARDS-The moving target of target-date funds

By Chris Taylor

NEW YORK, March 21 (Reuters) - If there has been a grand-slam home run among investment products in recent years, it is the target-date retirement fund.

A one-stop shopping choice for many retail investors, target-date funds allow an investor to pick a retirement date - say 2030 or so - and the mix of underlying investments is adjusted over time to support that goal.

Their popularity has proved eye-popping since they came into vogue, especially since 2006 when they were approved by Congress as default investment options in 401(k) plans. They house more than $582 billion in total assets as of the end of January, according to mutual fund research firm Lipper, a Thomson Reuters company. That includes a fresh $5.1 billion in inflows over January alone.

"Over the last five years, target-date funds have attracted the majority of assets flowing into equity funds," says Tom Roseen, senior analyst at Lipper. "That is an amazing statement."

The reason for this is that a lot of do-it-yourself investors have thrown in the towel, and just want to have their money professionally managed without worrying over how to allocate for themselves, Roseen says.


Like elegant watches, such funds may look simple from the outside, but their insides contain a complicated matrix of interlocking gears. And that accounts for very different results, depending on which target-date fund you are talking about.

One winner of the 2014 U.S. Lipper Fund Awards: Retirement 2015 from Baltimore-based fund shop T. Rowe Price, for those investors on the cusp of retiring. The fund generated returns of 15.18 percent for 2013, throttling category averages over the one-, three- and five-year periods.

But that was just one of a flurry of winners for the T. Rowe Price fund family. They also secured nods for their retirement funds (offered in five-year increments) all the way through 2050.

Think of target-date managers as the mad scientists of the investing world, throwing many different elements into the cauldron. So what's the secret to getting that mix just right?

"Our funds tend to have higher-than-average equity allocation for folks nearing retirement," says Jerome Clark, a portfolio manager who oversees the firm's target-date products. "In this environment, that allocation has boded very well for investors."

The composition of its 2015 fund at the end of 2013 included 40.3 percent domestic stocks and 18.5 percent foreign equities, a healthy percentage that has benefited from a robust stock market. However, it makes for higher-than-average risk in the event of a potential meltdown.

As with other target-date funds, that mix is continuously tweaked, edging toward more conservative investments such as fixed income and cash the closer one gets to retirement.

That so-called glidepath is the key to the success of another fund family in the space, American Funds from the Los Angeles-based Capital Group Companies. In fact, American Funds also hauled in multiple Lipper Awards this year, for funds with retirement target dates all the way through 2055.

"There are two kinds of glidepaths out there," notes Brad Vogt, Capital Group's senior vice president and portfolio manager who helps oversee the firm's target-date offerings. "For some, the investment mix basically fixes at the retirement date. For ours, that mix evolves all the way through retirement, and that approach has worked well for us."

After all, someone retiring at age 65 likely still has a very long road ahead. Average American lifespans have been heading up for decades and are now at 82.2 years for women and 77.4 years for men. This makes "longevity risk" a critical part of portfolio managers' thinking.

"That retiree needs to keep up with inflation, and rising costs for medicine, for housing, for food and travel," Vogt says. "If they have a highly preservation-oriented portfolio of fixed income or cash, they would lose ground. And if you lose ground over 20 years, you really lose ground."

That explains American Funds' relatively high equity allocation, which has helped returns through the robust bull market, notes Lipper's Roseen. Another factor in recent success is that its managers have so far resisted tossing in alternative investments like Real Estate Investment Trusts (REITs) and commodities.

Many other fund managers in the target-date space have done so, to seek out uncorrelated assets and broader diversification. But those alternative sectors got "clobbered" last year, says Roseen, which benefited American Funds' more streamlined investment mix.

Notably, target-date offerings from T. Rowe Price and American Funds boast expense ratios well below the category average, which has also assisted them in their outperformance. T. Rowe Price's Retirement 2015, for instance, charges an expense ratio of 0.65 percent, which is considered low for a mutual fund.

Of course, not all fund families have been seeing similar success with their target-date fund series. In recent years prominent names like Columbia, Oppenheimer and Goldman Sachs have shuttered their own offerings.

(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance; Editing by Beth Pinsker and Matthew Lewis)