Target-date funds trailed S&P 500 in 4QNews added by Benefits Pro on February 7, 2014

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By Paula Aven Gladych

While equity markets were strong in the last quarter of 2013, target-date funds didn’t return as much as the S&P 500, in large part because of poor performance in non-U.S. equities and bonds, according to a report by Ibbotson Associates.

Target-date funds returned an average 5.4 percent for the fourth quarter, which was significantly less than the 10.5 percent return of the S&P 500. TDFs usually include a mixture of both equity and fixed income.

The average total return for target-date funds for 2013 was 16.3 percent, which was about half the return of the S&P 500 Index.

Dispersion of returns across target-date fund families was large relative to past quarters’ variance. Equity-centric target-date funds, especially those with more U.S. equities, achieved the highest returns. Funds with exposure to real return asset classes like Real Estate Investment Trusts (REITs), commodities and Treasury Inflation Protected Securities (TIPS) struggled relative to peers, Ibbotson found.

Domestic REITs underperformed domestic equities during the fourth quarter. Commodities lost 1.1 percent during the quarter, making it eight quarters in a row that commodities have underperformed U.S. equities, Ibbotson said.

Fixed income securities returned a mixed bag in the quarter as the Federal Reserve began to taper its bond purchase program. Yields on 10-year government bonds rose to 3.04 percent from 2.64 percent as the Fed’s decision led to falling demand for treasury bills.

While the Barclays U.S. Aggregate index lost 0.1 percent during the quarter, high yield bonds returned 3.6 percent and continued to reward target-date funds that provided exposure to the lower end of the credit spectrum, the company found. TIPS, which are a staple in TDFs took a 2 percent loss for the quarter.

During the fourth quarter, nearly $13 billion flowed into target-date funds, a major increase from the $2.3 billion that flowed in during the third quarter of 2013.

Ibbotson Associates is a registered investment advisor and wholly owned subsidiary of Morningstar, Inc.

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