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Do target date mutual funds meet their targets?

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Abstract

We investigate the effectiveness of target date mutual funds (TDMF) performance relative to naive self-directed target date portfolios and identify which variables are related to positive performance. Overall, we find target date mutual funds do not outperform naive strategies but find several characteristics which are associated with positive Sharpe and Treynor ratio performance. When comparing TDMF to naive strategies, we find alpha, volatility, assets, dividend yield and turnover are positive and significant coefficients, while beta is negative and significant. Variables such as Morningstar rating and expense ratio are not significant, and puzzling given fees on TDMFs are typically higher than other funds. Investors are choice architects will be interested in the results as both are in some ways responsible for making good retirement investment choices. The paper also identifies the difficulty in using tools developed for all equity mutual funds to measure the unique aspects of TDMFs, specifically the glide path.

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Acknowledgements

Yi gratefully acknowledges research support from the McCoy College Development Foundation at Texas State University.

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Authors and Affiliations

  1. University of Southern Mississippi, 730 East Beach Boulevard, Long Beach, MS, 39560, USA

    William F. Johnson

  2. McCoy College of Business Administration, Texas State University, San Marcos, TX, 78666, USA

    Ha-Chin Yi

Authors
  1. William F. Johnson
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  2. Ha-Chin Yi
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Corresponding author

Correspondence to William F. Johnson.

Appendix 1: data and sample construction

Appendix 1: data and sample construction

We search target date mutual funds from Bloomberg and other sources and initially found 234 TDMFs. After deleting missing equity weights, return distributions, and fund identifiers, we are left with 171 TDMFs. After including target dates of 2035, 2040, 2045 and 2050 only, we are left with 144 TDMFs after dropping 24 TDMFs with 2055 target date and 3 TDMFs with 2060 target date.

In this study, we create two simulated portfolios using SPY and TLT. The first simulated portfolio is created by assuming 60% of capital invested on SPY and the rest of capital invested on TLT. Each TDMF is matched by this 60:40 simulated portfolio. The second simulated portfolio is created by assuming we invest on SPY by simulating each TDMF’s specific equity position and invest the rest of capital on TLT.

Note that TLT starts trading on July 29, 2002. Therefore, those TDMFs existed before TLT’s first trading date enter our sample on July 29, 2002, to be consistent with dates covered by the simulated portfolios. In addition, some TDMF which were introduced more recently into the market enter our sample after July 29, 2002, and each TDMF within the same target data may have different starting dates. As a result, there are 144 TDMF-simulated portfolio observations.

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Johnson, W.F., Yi, HC. Do target date mutual funds meet their targets?. J Asset Manag 18, 566–579 (2017). https://doi.org/10.1057/s41260-017-0054-7

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