Managers of target date funds have increased their allocations to equities, on average, but some of the funds' specific investment strategies are difficult to discern, a new study from Financial Research Corp. has found.
The study, released on June 3 and titled "Future Outlook for Lifecycle Funds: Insights Into Emerging Trends and Growth Opportunities," profiled 58 of the leading target date and target risk providers.
"We reviewed their prospectuses and we found that as a general rule we could find the basic features of target date asset allocation strategies in the fund prospectuses," said Lynette DeWitt, a research director with Boston-based FRC.
"However, there were cases where data [were] missing," she said. "It was difficult for us to compare one strategy against another."
One strategy was clear: increasing equity exposure. The report found that at the end of December, the average target date fund had 68% of its assets invested in stocks, up dramatically from 55% five years earlier.
"We're seeing higher equity exposure, more underlying investment categories. We've seen quite a bit of product development with more firms," Ms. DeWitt said.
"We're starting to see product packaging," she said. "The whole product has matured over the last couple of years."
In a separate report, "The Quarterly Report of Lifecycle Funds," the analysis showed that even though recent market volatility presented the first real challenge to life cycle funds since market declines early in the decade, the funds enjoyed net sales of $14.9 billion in the first quarter and asset growth of 1%.
But the disparities among funds are marked. For example,
Wells Fargo Advantage Dow Jones 2020 fund had 51% equity exposure, while Fidelity Freedom Fund 2020 had 69% equity exposure and Oppenheimer Transition 2020 had 90% of its assets in equities.
Ms. DeWitt said that only 5% of advisers suggest target date funds to clients because they have a number of concerns about the funds and feel they can't add value.
"It's not that the funds are a bad product, but I want to know what I'm buying. Currently, they're so different it's hard to get your hands around them," said Glen Lambinicio, an associate portfolio manager with Brown Advisory LLC in Bethesda, Md.
The firm is part of Baltimore-based Brown Advisory and Trust Co., which manages $13 billion in assets.
"We actually don't do a lot with them. We're active managers," Mr. Lambinicio said.
"I suppose they're OK for someone who wants to put in money and forget about it," he said.
Defined contribution plan participants may find that these funds work quite well, said Brian Nolan, an adviser with New Century Financial Group LLC, whose Princeton, N.J., firm manages $12 million in assets.
"Participants understand these funds. What you really want to do is get them over the inertia of joining the plan," Mr. Nolan said.
"If they have a financial adviser, then you can get them in a more personalized portfolio," he said. "If not, they're better selecting one of these."
While target date funds may not make much sense for high-net-worth clients, 401(k) participants who lack investment expertise may find them useful, said Lisa Falcone, a financial adviser with Newton, Mass.-based Sapers & Wallack Inc., which manages $200 million in assets.
"If you have no investment knowledge whatsoever and you're not comfortable picking funds and don't want to be bothered, then target funds are the way to go," she said.
Ms. Falcone also worries that many of these funds don't make their investment choices easily discernable.
"It's just not as transparent as other mutual funds where I can see everything," she said.
The funds must better outline their investment process, said Ms. DeWitt, who, while declining to name names of offending funds, pointed to Baltimore-based
T. Rowe Price Group as an example of a fund company that has done a solid job of outlining its strategies. "They do an excellent job of providing information on the prospectus," she said.
"In a typical target date fund, you really don't know what the makeup is," said Joseph Masterson, a senior vice president at Purchase, N.Y.-based Diversified Investment Advisors Inc., which administers retirement plans having $43.2 billion in assets as of yearend 2007.
E-mail Lisa Shidler at [email protected].
