ebook essays pieces of the puzzle
Thursday, May 8th, 2014
back to target

14 0508 2040 targets

In early 2009, I wrote an article (PDF) about the problems with target-date funds (TDFs).  I was reminded of that when I saw a magazine piece that identified four “basic design flaws” with the “glide paths” that form the foundation of those products:  “1) inefficient asset class exposure, 2) mis-specification of risk and return, 3) poor diversification, and 4) constant risk premium assumptions.”

The quote came from Rob Arnott and others at Research Affiliates; it was part of a 2013 paper published in the Journal of Retirement.  The article in aiCIO in which it appeared concerned custom TDFs.  (More information on them can be found in a posting from Hewitt EnnisKnupp.)

But the chart and comments today are in regards to the cookie-cutter standardized TDFs that have sucked up most of the defined contribution retirement assets since the rules were changed in 2006.  Yes, they still have many of the problems that I wrote about in 2009, but there have been some improvements.

On the last page of the latest print issue of InvestmentNews is a list of “Best- and worst-performing target date funds.”  They are sorted by three-month returns.  Um, what?  No wonder we don’t focus on the things that really matter.  There isn’t one valid reason for such a comparison in a publication aimed at financial advisors.

The funds shown above are of the 2040 vintage.  The Manning & Napier offering (MTTIX) is at the top of the chart of those three-month returns and the TIAA-CREF one (TCLOX) is near the bottom.  As you can see in the chart, they are almost identical in performance since March of 2009.

You can see the valiant dash that MTTIX has made on a relative basis since January.  Is that its greatness or TCLOX’s weakness?  I don’t know, but most all of the target groupings have a TIAA-CREF offering near the bottom.

What of it?  You’d have to understand the methodologies in depth to really understand judge was happening.  And you’d want to remember — which seems to be difficult for most market participants and media outlets to do — that to deliver on long-term goals, you must be willing to underperform in certain kinds of environments.

Read that last sentence again.  That’s the reality.  It’s time for us to get back to the true target.  (Chart:  Bloomberg terminal.)

three in one

The latest quarterly letter from GMO was actually three in one.  There were three sections, each from a different author.  My latest essay looks at them, a Cliff Notes version of the 22 pages, with some commentary.

As was anticipated, most of the coverage of the letter focused on one thing — one very unimportant thing.