Cites lack of performance at LifeCompass, lack of continuity at Schwab Target
Citing slumping performance and high costs, Morningstar Inc. has cut ratings on target date fund series from DWS Investments and Charles Schwab & Co. Inc.
The downgrades of DWS' LifeCompass and Schwab's Schwab Target were part of Morningstar's quarterly reports on target date fund families. Overall ratings on DWS fell to “bottom,” from “below average,” while Schwab Target declined to “below average,” from “average.”
For DWS, Morningstar analyst Greg Carlson noted that the funds in LifeCompass have trailed at least 80% of their peers since they were converted to target date funds from target risk in November 2007. Performance has been hampered by DWS' Core Fixed Income Fund, an intermediate-term bond fund that's now on its third manager in about two years.
Recently dated funds — like DWS' 2015 and its retirement funds — were hurt by large allocations to the Core Fixed Income Fund, with the 2015 fund having 30% of its assets placed into the option and 40% of the retirement portfolio's assets exposed to the fund in 2008, Mr. Carlson said.
Small tactical moves intended to raise returns haven't boosted the fund series yet. But Mr. Carlson added that they haven't contributed much to the overall cost of the series. “Most of these positions are under 1%,” he said. “In terms of fees, I can't imagine they're adding much at all.”
The DWS fund family also had a lot of overlap in its holdings. Indeed, the foreign equity exposure in one of its target date funds includes two foreign large-blend funds, a large-value fund, and two large-cap world stock funds — all actively managed — along with exposure to eight single-country exchange-traded funds.
What's more, the fees are on the higher end for actively managed funds at 0.96%, according to Morningstar.
DWS Investments spokesman Lem Brewster declined to comment on the report.
As for Schwab, its target funds have been stronger performers. But their showing has been dampened by management turnover, according to Morningstar analyst David Falkof. Daniel Kern, manager of the Schwab Target series, left the company last month after nearly three years on the job.
During his tenure at Schwab, Mr. Kern raised equity exposure for later-dated funds, while reducing it for funds that were nearing maturity. That change took place in April 2009. “Schwab and Kern had been weighing those changes for a while,” Mr. Falkof said. “If you look at the performance now, it's strong because of that change.”
The firm didn't have a successor to take the reins after Mr. Kern's departure, but manager Jake Gilliam has been chosen as the series' interim lead portfolio manager. Mr. Gilliam has no record of running an open-end fund.
Meanwhile, Caroline Lee, who had managed the Laudus International MarketMasters and Laudus Small-Cap MarketMasters funds, also worked closely with Mr. Kern and left Schwab in May.
"We had some turnover,” Schwab spokeswoman Alyson Nikulicz acknowledged. “But we're committed to building the right management team for the target date series."
For now, though, Schwab will have to deal with a less-than-flattering rating.
“Because it's unclear who will be running the series and the interim managers are untested in the mutual fund format,” Mr. Falkof noted, “the series' management earns a bottom rating.”
