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The Aggregation Effect.

Byline: Contributing Writer

Summary paragraph: This effect is apparent when measuring average performance of target-date funds against two different metrics

Target-Date Funds: Weighted* Average Performance by Assets, as of June 2015

CATEGORY*****Q2 2015*****YEAR-




2000 - 2010*****-0.40%*****1.50%*****1.80%*****7.40%*****8.40%*****36

2011 - 2015*****-0.40%*****1.70%*****2.30%*****8.70%*****9.40%*****37

2016 - 2020*****-0.30%*****2.00%*****2.60%*****9.70%*****10.40%*****55

2021 - 2025*****-0.20%*****2.30%*****3.00%*****11.10%*****11.40%*****46

2026 - 2030*****0.10%*****2.80%*****3.20%*****12.00%*****12.10%*****54

2031 - 2035*****0.20%*****3.00%*****3.50%*****13.10%*****12.90%*****46

2036 - 2040*****0.30%*****3.20%*****3.60%*****13.40%*****13.10%*****54

2041 - 2045*****0.30%*****3.10%*****3.70%*****13.60%*****13.30%*****45

2046 - 2050*****0.30%*****3.20%*****3.60%*****13.60%*****13.20%*****50


Source: Strategic Insight Simfund MF

Performance figures are weighted by ending assets of the funds included in the respective objective.

As of June 30, target-date funds (TDFs) in aggregate appear to have performed better for defined contribution (DC) participants on a short-term basis than what "do-it-yourself" investors could have achieved by allocating across major asset classes. This "aggregation effect" is apparent when measuring average performance (weighted by assets) of target-date mutual funds against two different metrics: weighted average performance of actively managed mutual funds-excluding target-date and target-risk funds-and major indices.

Perhaps the most discernible case is in the comparison of the performance of equity-heavy TDF categories against the Standard & Poor's (S&P) 500 Index. The S&P 500 returned 0.3% during the second quarter and 1.2% for the first six months of 2015. Equity-heavy target-date fund categories averaged similar quarterly returns but returned nearly 200 basis points (bps) more on a year-to-date basis, with 3.1%. Furthermore, actively managed domestic equity funds aggregately underperformed these same equity-heavy target-date categories over the second quarter, by 16 bps, and year-to-date periods, by 50 bps, as of June.

Actively managed taxable bond funds suffered a second-quarter loss of 0.8%, while bond-heavy target-date fund categories (income through 2025) on average experienced half of those losses, or -0.4%.

This short-term discrepancy is more pronounced when comparing the performance of the Barclays Aggregate U.S. Bond Index, which is -1.8% for the second quarter and -0.1% year-to-date through June, to near-dated target-date categories. However, target-date fund series with substantially higher U.S. bond allocations relative to peers and consistent with their glide path-such as PIMCO, Allianz and Invesco-subsequently ranked below most competitors for shorter time periods.

Similarly, actively managed international equity funds saw 1.1% in losses over the one-year period, while even target-date funds with high international exposure-such as BlackRock-posted positive returns over the same period.

Critics of target-date strategies may call these short-term asset-allocation performance advantages coincidental, or even irrelevant, as long-term performance is more influential, particularly at the gatekeeper level. To this extent, there are a handful of managers that posted strong quarterly and longer-term returns relative to their competitors. Only 11 out of 39 managers posted positive average returns for their target-date series in the second quarter, including American Funds, MainStay and TIAA-CREF. These three firms also ranked in the top five among target-date fund managers for their three- and five-year TDF performance.

It is our view that even temporary advantages seen through this "aggregation effect" will improve participant outcomes. Though this is no predictor of future performance, strong short-term performance in target-date strategies may result in beneficial performance-chasing if participants allocate to and remain in these professionally managed portfolios.-Bridget Bearden
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Date:Aug 1, 2015
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