Target date funds adding commodities

Managers of target date funds are adding commodities to their portfolio mixes, but experts wonder whether the moves are substantive or just window dressing.

The changes take several forms.

MFS Investment Management, for example, has filed to include a new commodities fund in its Lifetime Funds target date series that exposes the funds to the asset class for the first time.

DWS Investments, whose LifeCompass target date series already includes commodities, tweaked its exposure to the asset class. Rather than being split 50-50 between actual commodities and equities tied strongly to commodities, such as gold-mining stocks, the allocation is now invested solely in commodities.

The strategy lowers market correlation by reducing equity exposure, but it also lets DWS balance its commodities basket in anticipation of a price spike or dip for an individual commodity, said managing director Douglas Beck. “We’re looking for smarter ways to take advantage of market inefficiencies, and that’s even more important when the strategy is volatile,” he said.

Last year, Fidelity Investments dipped a toe into commodities by adding a commodities index fund to its target fund portfolios.

Although the addition of commodities is intended to provide broader diversification for target date funds through an asset class not typically correlated to equities, the portion of fund assets being allocated to commodities remains tiny. As of the end of February, for instance, just 0.5% of DWS’ 2040 LifeCompass fund was in commodities.

MFS, which registered its commodities fund March 8, will invest up to 5% of its 2040 Lifetime Fund in commodities, while its Lifetime Retirement Income Fund, which is intended for those who are already retired, can have up to 1% of its assets exposed to commodities.

At Fidelity, asset concentration can be as low as 5% for a 2010 Fidelity Freedom Fund or as high as 9.5% for the 2050 fund.

Fund executives said that the limited concentration mitigates the volatility of the asset class. But experts wonder whether adding what amounts to just a dash of commodities is more an attempt to appear trendy and compete against custom investment choices than it is to provide true diversification.

“The main thing is that the commodities allocation needs to be high enough in order to attribute performance to it: Is it a “me too’ thing or is it enough allocation to be a diversifier?” asked Lynette DeWitt, director of subadvisory and life cycle fund research at Financial Research Corp. “We won’t see much performance attributed to commodities until we see them written into the glide path, and at 5% to 10% allocations.”

Not all fund executives are convinced that the addition of commodities is meaningful.

“We just don’t find them to be attractive in terms of acting as a diversifier,” said Wayne Wicker, senior vice president and chief investment officer of ICMA-RC, a manager and administrator of retirement plans for government employees, and manager of the Vantagepoint target date funds. “Over the last three years, commodities haven’t provided as much of a benefit as you would expect,” he said, adding that the asset class is also costly.

“What’s popular isn’t necessarily good,” said Jeffrey Liautaud, an investment adviser and founder of Tree Fort Financial. “The idea of a strategy in a box really doesn’t work; what do you get out of it?”

The rationale for adding commodities may be twofold, according to Laura Lutton, an analyst at Morningstar Inc. It can help even out returns, which is important for investors who expect to own their target date funds for decades, and it gives funds a marketing edge.

“The funds can say: “This is why we’re different; another target date series doesn’t have this,’” Ms. Lutton said.

E-mail Darla Mercado at [email protected].