Strong returns from domestic small-cap stocks and commodities helped propel target-date funds' performance through the end of the year.
Performance for target-date funds was up for 2010, with the average fund bringing in 12.7% in returns over that time. The S&P 500 climbed by 15.1% over the year, according to the Ibbotson Target Maturity Report Q4 2010.
Growth in domestic small-cap stocks and commodities bumped up returns in target-date funds in the third quarter. Small-cap growth and small-cap value brought in 17.1% and 15.4% in returns, respectively, during that period, according to the report.
Thanks to a weaker euro, domestic equities beat their foreign counterparts, which reaped returns of 6.7% and 7.4% for non-U.S. developed equity and emerging markets, respectively, according to the report from Ibbotson Associates.
Adjusted for the full 12 months of 2010, domestic small-cap equities were still the winner, with a 29.1% return for growth stocks and 24.5% for value. However, real estate also emerged with large returns, reaching 27.9% for the full year.
Among fixed-income investments, high-yield bonds brought in a 15.1% return for 2010, making this the second consecutive year for big gains in that asset class. Treasury inflation-protected securities reaped some 6.3% in returns, while U.S. short-term bonds brought in 2.8% in gains.
The improved performance of target-date funds seemed to reflect their increased exposure to alternative asset classes, including commodities and real estate investment trusts, and emerging markets, said Tom Idzorek, chief investment officer and director of research for Ibbotson.
“One of the ways to have performance over the long term is to expand the number of available asset classes and include items that may have not been in the first set of target-date funds,” he said. “It's very common now to include exposure to emerging markets, TIPS, high yield, commodities and real estate.”
The Ibbotson report seemed to indicate a shift among plan providers' market share of flows into target dates, too. T. Rowe Price group's market share of flows in target-date funds seems to have fallen to 5.7% in 2010 from 15.2% in 2009.
Meanwhile, Fidelity Investments maintains its large hold over the target-date funds market with a 30.1% share of flows last year, although it is down from 33.7% in 2009. Vanguard Group has picked up market share, comprising 38.8% of flows in 2010, a jump from 31.6% in 2009.
On the surface, the shift in flows may indicate that plan sponsors are leaning toward fund groups that are more conservative, said Josh Charlson, a senior mutual fund analyst at Morningstar.
However, Ed Giltenan, spokesman for T. Rowe Price, said the firm's target-date fund flows rose last year.
“Our flows are, in fact, accelerating from $6.7 billion to $7.5 billion in 2010,” he said. Money has gone out of the firm's target-date funds and into T. Rowe's collective investments trusts, giving the impression that fund flows are slowing, Mr. Giltenan said.
Darla Mercado is a reporter with InvestmentNews, a sister publication of Pensions & Investments.