Ronald J. Surz is the President of PPCA, Inc (www.PPCA-Inc.com), an RIA in San Clemente, CA, providing manager due diligence technologies, and enhanced UMA platforms. read more ...
Target date funds are difficult to evaluate because they gradually reduce risk, i.e. equity exposure, through time. In evaluating these funds, therefore, two questions are relevant: What is the “right” amount of risk at a point in time, and has that risk been rewarded?
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At least you would think that these would be the important questions. The reality is that few questions are asked when choosing a target date fund, because most advisors select their bundled service providers without vetting them.
Fidelity, T. Rowe Price and Vanguard own 75% of this $400 billion industry, which would be just fine if there were no better choices. But there are.
The following scorecard compares and contrasts the risk-reward results for the “Big Three” to each other and to an alternative – the SMART Funds®. SMART Funds dominate with higher returns and less risk.
SMART Funds are collective investment funds (CIFs) from Hand Benefit & Trust in Houston. The benefits of CIFs are competitive fees (SMART institutional funds are 58 basis points all in) plus the trust company serves as a fiduciary to the 401(k) plan, unlike mutual funds.
SMART Funds use the patent-pending Safe Landing Glide Path® that integrates the tenets of Modern Portfolio Theory (MPT) with the disciplines of Liability Driven Investing (LDI), emphasizing safety at the target date. Other target date funds are far more aggressive at the target date, averaging 40% in equities versus the Safe Landing Glide Path’s 5%.
There is no fiduciary upside to taking risk at the target date – only downside.
At longer dates, the Safe Landing Glide Path equity allocation is similar to other glide paths except the risky asset allocation is substantially more broadly diversified, encompassing global stocks, bonds, commodities and real estate.
So here’s what we see in the past five years, and what we expect to see going forward. Near-dated SMART funds have outperformed in the past five years because of their rigorous risk controls. In normal (positive) stock market environments, near-dated SMART Funds will lag in performance. This is the opportunity cost of emphasizing safety near the target date.
Longer-dated SMART Funds have outperformed in the past five years because of their broad diversification, and we expect this to continue into the future.
The usual risk-reward trade-offs will apply to all SMART Funds, so we expect that the reward-to-risk ratios of the SMART Funds will dominate those of the industry at all target dates. We also think that over a full market cycle the longer-dated SMART Funds will continue to dominate the industry on both a return basis and a reward-to-risk basis, because of the broader diversification employed by the SMART Funds.
There are better target date funds. Please see our humorous video at Satire and Bloomberg’s report at Bloomberg.
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Ronald J. Surz is the President of PPCA, Inc (www.PPCA-Inc.com), an RIA in San Clemente, CA, providing manager due diligence technologies, and enhanced UMA platforms.
