Schwab's target date funds in 'the hands of a novice': Morningstar

Analyst also blasts high management turnover and use of proprietary funds
MAR 30, 2012
Morningstar Inc. this week gave The Charles Schwab Corp.'s target date funds a “negative” rating, pointing to a revolving door of managers at the funds. Analyst David Falkof gave the rating to a slate of funds in Schwab's series, going from 2010 up to 2040. Going back nearly four years, Schwab's fund series has had a series of different managers take the helm: Series manager Daniel Kern left Schwab in 2011 after running the funds since Oct. 2008. He was replaced on an interim basis by Mike Gilliam, who oversees the manager research team at Schwab's collective-trust business and has run the trust's target date portfolios since 2007, according to Mr. Falkof's report. At the end of this February, Schwab installed Zifan Tang, a veteran of Barclays Global Investors, as Mr. Gilliam's permanent replacement. Mr. Gilliam oversaw the Schwab target date series for only seven months. Mr. Falkof noted that though Ms. Tang spent 12 years at Barclays and worked on asset allocation models there, she was still new to portfolio management. She “has no previous public track record managing money,” Mr. Falkof wrote. “While Gilliam has a record on the trusts and is involved with the series overseeing the underlying managers, the ultimate portfolio decisions are now in the hands of a novice manager.” But Schwab spokeswoman Alyson Nikulicz said, "The target date funds are under the direction of a highly capable team, led by Omar Aguilar, chief investment officer, equities for Charles Schwab Investment Management [Inc.]." She noted that Mr. Aguilar, who oversees Ms. Tang, has 18 years of experience, including managing index, quant equity, asset allocation and multimanager strategies. "We also continuously evaluate the assets in these funds to determine whether they are best invested in internal or external managers, and make changes when appropriate," Ms. Nikulicz added. In her two months at the helm, Ms. Tang hasn't made any changes to Schwab's target date series. But Mr. Falkof noted the underlying funds are far from perfect. For instance, in mid-2011 — after Mr. Kern's departure — Schwab removed a requirement that at least 75% of its target date assets be invested in proprietary funds. But a good portion of the series' fixed-income investments — about 67% of it — remains held in Schwab Total Bond Market Ticker:(SWLBX) and Schwab Short-Term Bond Market Ticker:(SWBDX) index funds, which have fallen short of their benchmarks, Mr. Falkof noted. Schwab Total Bond Market “made substantial out-of-index bets, causing it to underperform its benchmark by 10 percentage points in 2008,” he wrote. The discount brokerage has taken some steps to improve its target date funds' performance. Those efforts include bringing in some nonproprietary funds, adding both Pimco's flagship Total Return Fund Ticker:(PTTRX) and Loomis Sayles Investment Grade Bond Fund Ticker:(LSIIX) to its fixed-income sleeve.

Latest News

The 2025 InvestmentNews Awards Excellence Awardees revealed
The 2025 InvestmentNews Awards Excellence Awardees revealed

From outstanding individuals to innovative organizations, find out who made the final shortlist for top honors at the IN awards, now in its second year.

Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty
Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty

Cresset's Susie Cranston is expecting an economic recession, but says her $65 billion RIA sees "great opportunity" to keep investing in a down market.

Edward Jones joins the crowd to sell more alternative investments
Edward Jones joins the crowd to sell more alternative investments

“There’s a big pull to alternative investments right now because of volatility of the stock market,” Kevin Gannon, CEO of Robert A. Stanger & Co., said.

Record RIA M&A activity marks strong start to 2025
Record RIA M&A activity marks strong start to 2025

Sellers shift focus: It's not about succession anymore.

IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients
IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients

Platform being adopted by independent-minded advisors who see insurance as a core pillar of their business.

SPONSORED Compliance in real time: Technology's expanding role in RIA oversight

RIAs face rising regulatory pressure in 2025. Forward-looking firms are responding with embedded technology, not more paperwork.

SPONSORED Advisory firms confront crossroads amid historic wealth transfer

As inheritances are set to reshape client portfolios and next-gen heirs demand digital-first experiences, firms are retooling their wealth tech stacks and succession models in real time.