One TDF series outperforms others in market plunge

The newer product line has a different approach to asset allocation than most other target-date funds

The recent stock market dive has wreaked havoc on target-date funds, but one provider’s series has been considerably less affected than most.

That line of products — Columbia Threadneedle’s Adaptive Retirement target-date series — saw less than half the amount of performance losses suffered by most other U.S. target-date mutual funds between Feb. 24 and March 12, amid the free fall in global markets fueled by the spread of the COVID-19 virus.

During that time frame, the 2020 vintages of U.S. target-date mutual funds returned -12.9%, on average, and a median of -12.1%, while 2055 funds saw returns of -24% on average, with a median of -23.8%, according to an analysis of data from Morningstar Direct. By comparison, Columbia’s 2020 fund returned -5.2%, and it’s 2055 fund returned about -13%, according to the Morningstar data.

“Our funds really do look nothing like any of the other funds in the [target-date] universe,” said Josh Kutin, lead portfolio manager for the series. “[They] were built for this sort of environment.”

The series is relatively new, with the first such funds launched in 2017. But the line of products is not the company’s first, however. Its prior Retirement Plus line of target-date funds closed in 2012.

The newer series has a different approach to asset allocation than most other target-date funds. Rather than setting allocations to capital, the series has allocations to risk, Mr. Kutin said. It has four different configurations for its glide path, which the company can quickly switch between in various market conditions. And it did so after Feb. 28, Mr. Kutin noted.

In February, the series was in its “neutral” glide path, with the 2020 fund having a 28% allocation to equity and its 2060 fund having 80% in equity and 65% in Treasuries, with the use of futures, Mr. Kutin said. It has since switched to a “capital preservation” assumption, with the 2020 fund now having just 7% off its assets in equity, and the 2060 fund having 20% in equity and 80% in Treasuries, with no borrowing.

“It’s really fortuitous that we were in this position,” he said. “Nobody could have predicted that this virus would have occurred.”

The firm’s target-date series was based on a similar concept used in its Adaptive Risk Allocation Fund, which was designed to outperform 60/40 funds, he said. That fund launched in 2014.

In bear markets, “that sort of risk-allocation approach inherently is going to do better,” Mr. Kutin said. But because the target-date series is able to switch to more aggressive allocations in up markets, it has been able to compete against more equity-heavy series, he said.

The series uses its “highly bullish” glide path about 5% of the time, its “bullish” glide path about 20% and its “capital preservation” glide path 10-15% of the time, he said. More often, it uses its neutral market glide path, he noted.

During the 2008 financial crisis, target-date funds suffered considerable negative returns, and the products were criticized for the heavy losses in portfolios designed for near-retirees. Afterward, some products scaled back their allocations to stocks, though the long-running bull market encouraged a handful of firms to increase their levels of risk.

However, the target-date funds for investors who are near retirement have experienced a smaller proportion of losses than longer-date funds over the past several weeks than compared with the losses seen in 2008.

The recent market plunge could result in some target-date managers revisiting their glide paths and scaling back allocations to stock, Mr. Kutin said.

“This sort of environment reminds investors that the market does not go up forever,” he said.