Target-date funds were hammered in the third quarter and fared worse than the S&P 500 because of international stock losses, but advocates remain hopeful that investors won't dump them based simply on short-term performance.
The average target-date fund lost nearly 10% in the third quarter, worse than the Standard & Poors 500 stock indexs loss of 8.4%. The miserable performance of international stocks the Morgan Stanley Capital International Europe Australasia Far East index plunged 20.5% in the quarter caused the average target-date fund to underperform the S&P 500, said Tom Idzorek, chief investment officer and director of research and product development with Chicago-based Ibbotson Associates Inc.
We suspect the pain target maturity investors have felt this year has many investors truly questioning their target-maturity investment for the first time, he said. Plan sponsors who moved quickly at the beginning of the year to automatically map investors into a target-maturity solution are likely very concerned.
While it was expected that the target-date funds would lose money, Mr. Idzorek was stunned that the funds underperformed the S&P 500 because they tend to perform better in a down market.
The third-quarter average loss trounced the second-quarter average loss of 0.9% and also exceeded the first quarter's loss of 6.8%.
The thing that happened this quarter is, international equities were demolished, Mr. Idzorek said. Its extremely unusual, he said. Over the last decade or two, investors have been adding international exposure to their portfolios, which I believe to be a very good thing, but in this particular quarter, boy it hurt.