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.
