- T. Rowe Price examined 11 of our U.S. Retirement Funds (RFs) with at least 10-year records to quantify the value added by our strategic investing approach.1
- On average, the 11 funds outperformed their benchmarks in 85% of rolling five-year periods and in every rolling 10-year period since inception, net of fees.
- T. Rowe Price seeks to add value for clients at multiple levels, including glide-path design, long-term diversification, and our strategic investing approach.
- We believe our strategic investing approach―including tactical allocation and active management of the underlying strategies―can enhance retirement outcomes.
To demonstrate that T. Rowe Price’s target date investment process historically has created value for our clients, we conducted a rigorous study of the performance of all of our RFs that had at least 10‑year track records as of December 31, 2018. These 11 RFs held virtually all (more than 99%) of the RF assets managed by the firm as of that date.2
We examined fund performance at three different levels to quantify the following:
1. The value added by T. Rowe Price’s tactical allocation process. Returns were calculated based on each fund’s fixed strategic asset allocations and then compared with actual returns, which reflect tactical allocation changes.
2. The value added by security selection. Excess returns—net of fees and other costs—were calculated for the underlying funds in each RF relative to each underlying fund’s asset class, sector, or style benchmark. These fund‑level returns were then aggregated to show the total excess returns achieved by each RF.
3. The total value added by T. Rowe Price’s implementation. RF returns were compared with combined index benchmarks constructed by T. Rowe Price that track the strategic allocations of each fund as it moves along its glide path.
For each level of fund performance, two measures were calculated:
- Active success rates: The percentage of total rolling periods in which the RF added value at the performance level being measured.
- Excess returns: The value added by each RF at the performance level being measured. Excess returns were calculated for each rolling period and then averaged across all the periods in each time frame.
To provide a summary of the effectiveness of T. Rowe Price’s target date process, we also calculated performance averages for all 11 RFs across all three levels of our analysis (total value added, tactical allocation, and security selection). To account for the differing longevity of each RF, these averages were time weighted—the results are based on the percentage of the total performance periods in each time frame provided by each RF.
By and large, the time‑weighted averages reflect the same results as for the individual Retirement Funds: The total value added by T. Rowe Price’s implementation and the contributions made by tactical asset allocation and security selection were all positive and relatively stable across different time periods.3
Time-Weighted Average Active Success Rates for T. Rowe Price Retirement Funds
Fund Inceptions Through December 31, 2018
Time-Weighted Average Annualized Value Added (in Basis Points) for T. Rowe Price Retirement Funds
Fund Inceptions Through December 31, 2018
Sources: Bloomberg Barclays; MSCI, Please see important information section for information about this MSCI information.; Russell; and T. Rowe Price. Data analysis by T. Rowe Price.
Individual performance results for the 11 RFs in our study also were strongly positive across both 5‑ and 10‑year time frames:
- Tactical asset allocation: The performance contribution from tactical allocation was positive in every 10‑year rolling period for every fund (i.e., a 100% active success rate). Active success rates were overwhelmingly positive across five‑year rolling periods (averaging 93%). Value added was positive across all time frames.4
- Security Selection: Excess returns were positive in every 10‑year rolling period for every RF and strongly positive (averaging almost 90%) across five‑year rolling periods. Excess returns were positive across all time frames for all funds.
- Total implementation: Active success rates were positive in every 10‑year rolling period for every RF and averaged 85% across five‑year rolling time periods. Annualized excess returns were consistently positive across all time frames for all funds.
Our Approach to Strategic Investing
T. Rowe Price’s target date process seeks to improve outcomes for our target date clients at multiple levels—via glide‑path design, long‑term diversification, tactical asset allocation, and our strategic investing approach. We believe the value added by our target date implementation can meaningfully enhance retirement outcomes for investors.
Bottom‑up fundamental research is at the core of how we manage the underlying strategies in our target date funds. That means that over 400 of our investment professionals go beyond the numbers by visiting senior corporate executives in their offices, touring their companies, and checking reality on the ground with suppliers and customers.5 This enables them to ask the right questions to get a deeper understanding of where a company stands and where they think it could go in the future.
Our target date managers, backed by our committee of asset allocation experts from across multi‑asset, equity, and fixed income, seek to get ahead of change by identifying attractive near‑term asset valuations and using prudent tactical allocation adjustments to take advantage of those potential opportunities.
Experience has been a critical component of our success as well. Our skilled portfolio managers have deep experience—an average of 22 years in the industry and 17 years with T. Rowe Price.6 Significantly, many of our analysts go on to become portfolio managers, which we believe creates a strong foundation on behalf of our clients.
Read the Study
1 All funds are subject to market risk, including possible loss of principal. For more information on the T. Rowe Price funds used in this study, please view the methodology summary.
2 One Retirement Fund with a relatively distant target date (2060) was excluded from the study because of its relatively short performance track record.
3 Certain types of assets are not represented in the combined index benchmarks of the Retirement Funds. These out‑of‑benchmark allocations may include high yield bonds; floating rate bank loans; emerging markets bonds; international bonds; dynamic global bonds; U.S. long‑term Treasury securities; and a “real asset” allocation consisting of natural resources, metals and mining, and real estate stocks. As a result of the returns contributed by RF out‑of‑benchmark allocations, the value added by tactical allocation and security selection does not exactly equal the value added by total implementation shown in the "Time-Weighted Average Annualized Value Added" figure.
4 The out‑of‑benchmark allocations in T. Rowe Priceʼs combined index benchmarks may materially affect RF excess returns relative to those benchmarks. For more information on the complete analysis and the excess returns attributable to out‑of‑benchmark allocations, please view the methodology summary.
5 Investment staff as of 12/31/2018. Includes 105 portfolio managers, 24 associate portfolio managers, 165 investment analysts, 44 associate analysts, 14 multi-asset specialists, 9 specialty analysts, 2 strategists, 2 economists, 29 traders, and 18 senior managers.
6 As of December 31, 2018.
The principal value of the Retirement Funds is not guaranteed at any time, including at or after the target date, which is the approximate year an investor plans to retire (assumed to be age 65) and likely stop making new investments in the fund. If an investor plans to retire significantly earlier or later than age 65, the funds may not be an appropriate investment even if the investor is retiring on or near the target date. The fundsʼ allocations among a broad range of underlying T. Rowe Price stock and bond funds will change over time. The funds emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with the need for income as retirement approaches, and focus on supporting an income stream over a long‑term postretirement withdrawal horizon. The funds are not designed for a lump‑sum redemption at the target date and do not guarantee a particular level of income. The funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility over shorter time horizons.
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are those of the authors as of March 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.
Bloomberg Index Services Ltd. Copyright © 2019, Bloomberg Index Services Ltd. Used with permission.
This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.
T. Rowe Price Investment Services, Inc., Distributor.
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