Retire Rich

September 17, 2007

New Criticism of Lifecycle Funds Aims at Inflexibility

Lifecycle funds are now taking another punch, and while this one may not be fully merited, it is one that fund companies might want to consider as a roadmap to improving such funds' performance and marketability.

First, it was that lifecycle, or target-date, funds were too conservative in their equity/fixed income allocations and would not be able to provide retirees with adequate income to last as long as 20 or 30 years.

Fund companies responded, nearly unilaterally, by increasing U.S. and international equity holdings in target-date funds, even in income funds created specifically for those in retirement.

Then, apparently in their quest to differentiate their lifecycle funds from competitors and attract more assets, fund companies pushed the envelope even further and began packing them with alternative investments, such as real estate, commodities and emerging markets. This was met with yet another wave of spirited criticism, this time charging that lifecycle funds were becoming too risky.

Now a third wave of criticism has emerged, and to fund companies' credit, I'm not sure it's fully merited, although it is something they may want to take into consideration-particularly as a differentiating factor that fund companies can use to boost lifecycle funds' performance and position them differently from competitors.

According to a report from an investment strategy think tank called the Compass Institute, lifecycle funds are too inflexible because they adhere to projected market forecasts without taking economic developments and current market conditions into consideration. Now, that's not entirely true. Portfolio managers do oversee target-date funds and, typically, reallocate their portfolio holdings every quarter. However, perhaps target-date funds could be more actively managed and respond more nimbly to market conditions.

The Compass Institute studied the results of target-date and other formulaic asset allocation funds-such as balanced funds, managed accounts and funds that use Monte Carlo simulation-over the past 10 years and found that the worst-performing funds delivered average annual returns of 6.9%. On the high end, they rose an average of 8.8% a year.

By comparison, asset allocation funds with an adaptive mandate rose an average of 14.1% a year.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

http://www.mmexecutive.com http://www.sourcemedia.com

Recent Posts

Tear a Page From the AARP/Today Show Playbook

America has yet to witness the tremendous societal transformation retiring Boomers will have, as the oldest is a mere 64 and the youngest, 46. But we are beginning to see signs of the tsunami-sized impact this army of 77 million will have on the workplace, the economy, healthcare and even the arts and entertainment. AARP has just formed a timely, unbelievably beneficial partnership with NBC's "Today Show." Beginning tomorrow, March 9, the No. 1 morning news program that reaches 5.9 million viewers a day, is bringing back former Emmy Award-winning host Jane Pauley to produce and report a monthly segment called, "Your Life Calling."

It's About Time for an About-Face for Funds

It's about time mutual fund product developers thought out of the Morningstar investment-style box to give portfolio managers the ability to do an about-face.

One of the most critical discussions to come out of the financial crisis has been the questioning of the rigid investment mandates of mutual funds and the soundness of 60-year-old modern portfolio theory-since correlations between investment classes are obviously becoming more intricately woven in the global economy of the 21st century and the markets are prone to increasingly higher volatility and risk.

Extreme Makeover: 401(k) Edition

Investors are about to test drive 401(k) plans with a 21st Century whole new look and feel. The Department of Labor is promising streamlined rules for 401(k) advice that plan sponsors may actually use. The government is looking into the possibility of offering annuities or other lifetime income options in defined contribution plans.

C- Grade is Nothing To Crow About for 401(k)s

The mutual fund industry should proudly celebrate Americans' 73% approval rating for 401(k)s, according to an Investment Company Institute report, "Enduring Confidence in the 401(k) System." In our book, a 73% rating equals a C- grade that, in fact, should be a wake-up call for the industry to do a far better job of equipping Americans to adequately prepare for a decent and healthy life in their old age.

Index of Posts

0 Comments

Be the first to comment on this post using the section below.

Add Your Comments...

Already Registered?

If you have already registered to Money Management Executive, please use the form below to login. When completed you will immeditely be directed to post a comment.

Not Registered?

You must be registered to post a comment. Click here to register.