- We believe T. Rowe Price’s strategic investing approach, underpinned by the rigor of our independent research and the decision-making of our experienced portfolio managers, has created long-term value for our clients.
- While all target date managers make active decisions related to glide-path design and diversification, the underlying portfolio implementation of these designs can be done passively, actively, or through a combination of the two. Some managers take a passive approach, adhering to their long-term asset allocations and indexing the underlying portfolios. Others, like T. Rowe Price, use a strategic investing approach that includes both tactical asset allocation and active management of the underlying portfolios.
- T. Rowe Price conducted a rigorous study to evaluate whether our strategic investing approach has outperformed passively managed alternatives. We compared the performance of our Retirement Funds (RFs) that had at least a 10-year track record with combined index benchmarks in order to quantify the value added by our implementation, including tactical allocation and excess returns on the underlying T. Rowe Price funds.
- Our study found that the RFs studied outperformed their combined index benchmarks in at least 85% of rolling five-year periods and 100% of rolling 10-year periods from inception through December 31, 2017, net of fees. RF outperformance was primarily driven by positive contributions from tactical asset allocation and security selection.
- For all 11 RFs, tactical allocation added value in 96% or more of all rolling five-year periods and in 100% of rolling 10-year periods since inception. For nine of the 11 RFs, security selection added value in at least 78% of all rolling five-year periods. All 11 RFs posted positive contributions from security selection over every rolling 10-year period since inception.
To demonstrate that T. Rowe Price’s target date process historically has created value for our clients by outperforming purely passive strategies, we examined the performance of all of our Retirement Funds (RFs) that had at least 10-year track records as of December 31, 2017. These 11 RFs held virtually all (99.9%) of the Retirement Fund assets managed by the firm as of that date.¹
We examined relative returns for three different metrics:
- To quantify the total value added by T. Rowe Price’s target date implementation, RF returns in each rolling period were compared with combined index benchmarks created by T. Rowe Price that closely mirror the strategic allocations of each RF as it moves along its glide path.
- To quantify the value added by T. Rowe Price’s tactical allocation process, RF returns calculated using each fund’s fixed strategic asset allocation were compared with the returns based on actual allocation weights.
- To quantify the value added by security selection, excess returns—net of fees and other costs—were calculated for the underlying funds in each RF (these funds are shown in Figure A2). Returns were calculated relative to each underlying fund’s asset class, sector, or style benchmark. Returns were then aggregated to show the total excess returns for each RF.
Source: T. Rowe Price.
As can be seen, the first metric—the total value added by T. Rowe Price’s implementation—is primarily composed of the second two metrics: the additional returns achieved through tactical asset allocation and the excess returns contributed by security selection in the underlying funds. This relationship is illustrated in Figure 1.2
For all three metrics in our analysis, two performance measures were calculated:
- Active success rates: The percentage of the total rolling periods in each time frame in which the RF outperformed its combined index benchmark or in which tactical allocation or underlying portfolio management made a positive contribution to RF returns.
- Excess returns: The annualized return for each RF relative to its combined index benchmark, or the return contribution (either positive or negative) made by tactical asset allocation or by security selection in the underlying funds. Excess returns were calculated for each rolling period and then averaged across all the periods in each time frame.
Our study examined RF performance over both short- and long-term rolling time periods. However, we feel strongly that longer time horizons provide the most meaningful measures of target date implementation, as they smooth out the effects of shorter-term market fluctuations that can produce a distorted picture of relative performance. Accordingly, our analysis was focused primarily on performance over rolling five-year and rolling 10-year periods, rolled monthly.3
Overall, we found that relative performance for the 11 RFs in our study was strongly positive for all three metrics across both 5-and 10-year time frames since fund inception (Figures 2 and 3). In other words, in far more rolling periods than not, T. Rowe Price’s Retirement Funds added value for investors at each stage of target date implementation.4
- Tactical asset allocation: The performance contribution from tactical allocation was positive in every 10-year rolling period for every fund since inception (i.e., a 100% active success rate). Active success rates also were overwhelmingly positive across five-year rolling periods (averaging 99%). Value added was positive and relatively consistent across all time frames (Figure 4).
- Security selection: Excess returns also were positive in every 10-year rolling period for every RF since inception and strongly positive (averaging 85%) across five-year rolling periods. Excess returns were positive across all time frames for all funds (Figure 5).
- Total implementation: Active success rates were positive in every 10-year rolling period for every RF and averaged 88% across five-year rolling time periods for all RFs. Annualized excess returns were consistently positive across all time frames for all funds (Figure 6).
Figure 4: Active Success Rates and Value Added by Tactical Allocation
Sources: Bloomberg Barclays, MSCI, Russell, and T. Rowe Price; data analysis by T. Rowe Price.
Figure 5: Active Success Rates and Value Added by Security Selection
Sources: Bloomberg Barclays, Credit Suisse, J.P. Morgan, MSCI, Russell, Standard & Poor’s, and T. Rowe Price; data analysis by T. Rowe Price.
Figure 6: Active Success Rates and Value Added by Total Implementation
Sources: Bloomberg Barclays, MSCI, Russell, and T. Rowe Price; data analysis by T. Rowe Price.
Positive Shorter-Term Results
Although the primary focus of our study was on longer-term relative performance, we also examined relative returns and active success rates over shorter time horizons—rolling one-year and three-year periods. Among our findings:
- Tactical asset allocation: Active success rates for tactical allocation were positive across the vast majority of rolling three-year time periods (85% average) for all RFs and across most rolling one-year periods (71% average). Value added was positive, on average, for all RFs across both one-year and three-year periods (Figure A4).
- Security selection: Relative performance was generally positive (average 73%) across rolling three-year periods and also positive (average 59%) across rolling one-year periods for nine of the 11 funds. While one-year and three-year active success rates were slightly negative (i.e., just below 50%) for two funds, excess returns from security selection were positive, on average, for all 11 funds across all time periods (Figure A5).
- Total implementation: Active success rates for all RFs were firmly positive, averaging 83% across three-year rolling periods and 63% across one-year rolling periods. Again, the total value added by T. Rowe Price’s implementation process was positive across all time periods for all RFs (Figure A6).
1 One Retirement Fund with a relatively distant target date (2060) was excluded from the study because of its short performance track record. A list of the Target Funds and their inception dates can be found in Figure A1 in the appendix.
2 Certain asset sectors—such as high yield bonds, international bonds, and emerging market bonds, as well as a “real asset” allocations of natural resources and real estate stocks—are not represented in T. Rowe Price’s combined index benchmarks. These out-of-benchmark allocations may materially affect RF excess returns relative to the combined index benchmarks. Excess returns attributable to out-of-benchmark assets are included in the relative performance results shown in this paper but are not broken out separately. A table showing out-of-benchmark contributions to excess returns (positive or negative) can be found in Figure A7 in the appendix.
3 Shorter-term results (for rolling 1- and 3-year periods) are displayed in Figures A4, A5, and A6 in the appendix.
4 Performance averages were calculated for all 11 RFs within each time frame. These averages were time weighted to reflect their differing inception dates. The weights for each fund in each time frame can be found in Figure A12 in the appendix.
Call 1-800-225-5132 to request a prospectus, which includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.
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 post-retirement 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.
The views contained herein are as of March 2018 and may have changed since then.
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.
Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell indexes. Russell® is a trademark of Russell Investment Group.
Note: Bloomberg Index Services Ltd. Copyright 2018, Bloomberg Index Services Ltd. Used with permission.
Price Perspectives are provided for informational and educational purposes only and are 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. This Price Perspective provides opinions and commentary that 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 cannot guarantee future results.
T. Rowe Price Investment Services, Inc., Distributor.