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Target-Date Funds: The Wallflowers Are Dancing This Year

So far in 2015, shorter-dated funds are outperforming longer-dated funds.

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Janet Yang: In the first nine months of 2015, target-date investors saw a pattern of performance that doesn't happen too often: Longer-dated target-date funds that are meant for younger investors underperformed shorter-dated funds intended for workers closest to retirement. Because those longer-dated 2050 and 2055 funds generally hold more equities than shorter-dated 2015 or 2020 ones, that pattern typically only happens when stocks underperform bonds. August's market correction saw the S&P 500 drop 12.5% from its recent peak to its recent trough, and that was enough to generally put stock returns behind those of bonds, year to date. In the last 10 calendar years, shorter-dated target-date funds have only outperformed longer-dated ones twice--in 2008 and again in 2011.

Against this backdrop, the Bronze-rated PIMCO RealPath series posted disappointing results. The series tends to hold a lower allocation to equities than peers, which should have been a helpful tailwind to results. However, the series is also one of the more globally diversified ones available. That has resulted in a hefty allocation to emerging markets, which have seen double-digit losses so far this year.

On the other end of the spectrum, almost every fund within the Silver-rated MFS Lifetime series has ranked in the top decile of its respective peer group. Those results are somewhat surprising because there's nothing obvious that would suggests it should do so well. The average market cap of its portfolios tends to be on the smaller side, which would have hurt results. Its allocation to equities is generally similar to the industry average, which shouldn't have hurt or helped. Instead, the underlying funds used in the series have had a really strong run of late. MFS Growth (MFEKX), for example, is one of the series' main equity funds. Only about a third of large-growth funds have outpaced the Russell 1000 Growth Index so far this year, and that fund was one of them. So, while discussions of target-date fund results often center around asset-allocation positioning, MFS Lifetime's results underscore the importance of having conviction in the underlying funds used in target-date series.

Janet Yang Rohr, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.