The 1st quarter of 2021 is in the books and, needless to say, it was a bit less adventurous than 1Q20! Here is a look at the Target Date Fund (TDF) industry performance for the quarter:
Longer dated vintages generally returned in the +3.5 to +7% range, while vintages nearer to, or in, retirement returned in the -1 to +3% range. Here is an isolated view of the 2040 vintage, with the range of equity percentages on the x-axis.
While there is a somewhat linear relationship between equity holdings and returns (i.e more equity = higher returns), there is also a somewhat wide divergence of returns between funds with equal amounts of equity. For example, in the 83-84% equity range, there were TDFs returning as high as 7% and as low as 1.5%. What would cause such a large performance dispersion for funds with equal equity (and fixed income) exposure? Here are some common exposure differentials which may have caused dispersion.
(Grid Source: Stadion)
You can also see a large dispersion between small-cap exposures in the S&P 600 and Russell 2000. So TDFs benchmarking their small-cap exposure to the S&P 600 had a bit of a tailwind this quarter. This was a rather sharp reversal in the trend we have seen since mid-2018, which saw the Russell 2000 outperform the S&P 600.
In another reversal from previous trends, Value stocks decently outperformed their Growth counterparts on the quarter:
(Grid Source: Stadion)
Again, this was a sharp reversal of previous trends which saw Growth stocks massively outperform Value.
While interest rates began to climb in the latter part of last year, this quarter saw the trend accelerate. Here are treasury rates from the end of the year compared to end of 1Q21.
(Chart Source: Stadion)
These moves led the Bloomberg Barclays US Aggregate Bond Index to return -3.37%, marking its 4th worst quarter ever and only the 5th time it returned less than 3% for a quarter (with the others occurring in 1979-1981). The 10 Year Treasury rate reached a level last seen at the beginning of 2020, right before the selloff in risk assets. While other factors should certainly be considered when determining fixed income returns (i.e., quality exposure, inflation-protection, etc.), generally those TDFs with longer duration profiles in their fixed income holdings would have underperformed those with shorter duration profiles.
So where does these leave us? The 1st quarter saw sharp reversals in previously established trends. Are those just a blip on the radar and we will see previous trends pick back up, or are these moves the start to new trend forming in the market? TDFs have the benefit of a diversified mix of assets and exposures. But each TDF can also vary in how much they have exposed, whether it something like more small-cap exposure or a longer duration profile. It is important to do due diligence to see how a certain TDF is invested and how that may form outcomes.
A target-date fund is a class of mutual funds or ETFs that periodically rebalances asset class weights to optimize risk and returns for predetermined time frame.
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
The S&P 600 is an index of small-cap stocks managed by Standard and Poor’s. It tracks a broad range of small-sized companies that meet specific liquidity and stability requirements.
The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
The 2-year Treasury note is a debt obligation issued by the United States government with a maturity of 2 years upon initial issuance.
The 5-year Treasury note is a debt obligation issued by the United States government with a maturity of 5 years upon initial issuance.
The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance.
The 30-year Treasury note is a debt obligation issued by the United States government with a maturity of 30 years upon initial issuance.
There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical measurements are one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity.
There is no guarantee of the future performance of any Stadion account. Material has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Results based on available universe of Target Date Fund Series, which includes registered mutual funds, and non-registered collective investment funds and insurance accounts. Collective investment funds and insurance accounts are only available for investment to qualified retirement plan assets such as 401(k) plans.
The commentary, analysis and opinions expressed are those of Stadion’s Investment Team. The commentary, analysis and opinions referenced are as of the date of publication and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice. This is not a recommendation to buy or sell a particular security. The investment strategy or strategies discussed may not be suitable for all investors.
This document may contain certain information that constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology. No assurance, representation, or warranty is made by any person that any of Stadion’s assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future.
Diversification does not eliminate the risk of experiencing investment losses.
Stadion Money Management, LLC (“Stadion”) is a registered investment adviser under the Investment Advisers Act of 1940. Registration does not imply a certain level of skill or training. More information about Stadion, including fees, can be found in Stadion’s ADV Part 2, which is available free of charge.
The opinions expressed herein are those of Stadion Money Management and are subject to change without notice.
©2021 Stadion Money Management, LLC. All rights reserved. Stadion and the Stadion S are registered service marks of Stadion Money Management, LLC. StoryLine is a service mark of Stadion Money Management, LLC.
Investment advisory services and products provided by Stadion Money Management, LLC, a registered investment adviser. Registration does not imply a certain level of skill or training. More information about Stadion’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.
Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.