Target-date fund returns underperformed the S&P 500 by half in 2013 and in the fourth quarter, according to the latest Ibbotson Target Date Report from Morningstar.
Target date investments climbed 16.3 percent last year, or just half of the 32 percent rise in the S&P 500. The fourth quarter saw a similar performance disparity with returns of 5.4 percent for target date investments versus 10.5 percent for the S&P 500.
Target-date funds devoted to U.S. equities, lower credit quality bonds and shorter duration debt had higher returns while funds concentrated on REITs, commodities and Treasury inflation-protected securities struggled, according to the Ibbotson study.
While the fourth quarter’s target-date fund performance was significantly weaker than the market as a whole, net inflows to these funds rose by $13 billion, or nearly five times greater than in the third quarter.
In 2013, target-date funds attracted $51 billion in new assets for a total of $621 billion. The amount of new money coming into the funds annually since the start of the financial crisis has been consistent, averaging $48 billion for each of the past five years.
Ibbotson said passively managed funds have been gaining traction in the target-fund space, accounting for one-third of target-date assets compared to 24 percent five years ago.
Vanguard’s family of target-date funds have gained strength at the expense of Fidelity. Vanguard’s share of the target-date fund market rose from 22 percent in 2009 to 27 percent last year, while Fidelity's share dropped from 39 percent to just under 30 percent during that timeframe.