Journal of Risk

Target-date funds: lessons learned?

Bin Chang and Laurence Booth

  • With data from 2011 to 2020, we find that target-date funds (TDFs) do reduce their allocation to equities as they move closer to their target dates, that is, there is an absence of the return chasing strategies that existed prior to the 2008/9 financial crisis.
  • We also find significant heterogeneity in expense ratios, turnovers, asset allocations, and performance among TDFs with the same target-date.
  • Finally, we find that the impact of the stock market crash on TDFs during the beginning of the Pandemic was temporary: AUM, flow and returns were hit in March 2020, but quickly recovered, while their asset allocation and turnover ratios did not materially change.

Target-date funds are mutual funds with a date in their description. The date signifies the retirement date for the person for whom the mutual fund is designed. The basic proposition is that the fund’s composition will be adjusted as it evolves toward that date, which will relieve the investor of the problem of asset allocation. These funds received a significant boost in 2006 when they became the default choice of many defined contribution plans. However, in our 2011 paper in The Journal of Risk we showed that many funds significantly increased their allocation toward equities immediately prior to the 2007–9 global financial crisis and consequently saw significant losses. Since this was only shortly after target-date funds became a significant component of the mutual fund market, this research assesses the maturation of target-date funds and their performance during the Covid-19 pandemic, when there were again significant market losses. Overall, our assessment is that target-date funds have largely met their designation and there is no evidence of them similarly gaming their asset allocation as occurred prior to the financial crisis.

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