Active management may hurt target dates

An in-depth analysis of target date funds and found that many funds are not delivering on their promises to provide enhanced performance by having active management. Target Date Analytics of San Clemente, Calif-based found that if companies had used passive management for the target date funds it would have meant stronger results for investors. The company analyzed date funds with three years of history or more and it covered 92 funds, 15 fund families and a total of $161 billion in assets. The study used the "TDA Index" to calculate the "selection" effect by using each mutual fund's actual average allocation to five asset classes during the three years and applying these to passive index returns. The difference between the fund's actual performance and passive return is the selection effect – and it showed that selection scores for the past three years are generally negative across all target date funds, indicating that passive implementation of the actual asset mix would have served investors better. The company also measures an “allocation effect” — the difference between the return on the passive implementation of the fund’s actual allocation and on the company’s benchmark return. Most near-dated target date funds outperformed the benchmark over the past three years because of higher equity exposure which creates a good allocation score. By contrast, most longer-dated mutual funds have negative allocation scores because they are less diversified and occasionally less aggressive. The company expects to release reports on individual funds companies soon. Those reports will include qualitative as well as quantitative evaluations of target fund offerings.