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The T. Rowe Price Approach

Target Date Strategies:

The Benefits of T. Rowe Price's Strategic Investing Approach

T. Rowe Price

Executive Summary

  • 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. Our target date process seeks to enhance retirement outcomes both through dynamic tactical adjustments and security selection in the underlying strategies.
  • To document the value added by T. Rowe Price’s target implementation process, we examined the performance of 11 of our Retirement Funds (RFs)—those that had at least a 10-year track record. The returns net of fees on each RF were compared with their combined index benchmarks in order to quantify the value added by T. Rowe Price’s implementation, including tactical allocation decisions and excess returns generated by security selection in the underlying funds.1
  • Our study found that the 11 RFs studied outperformed their benchmarks in at least 85% of rolling five-year periods and 100% of rolling 10-year periods (rolled monthly) from inception through December 31, 2017, net of fees.
  • We believe the success of T. Rowe Price’s target date program stems from the firm’s core strengths. Our target date managers seek to get ahead of change by identifying attractive near-term asset valuation situations and positioning their portfolios to take advantage of potential opportunities.
  • Managers of the underlying funds in our target date strategies seek to add value for clients through security selection. That means our investment professionals go beyond the numbers to see firsthand how the companies we invest in are performing today in order to make skilled judgments about how we think they’ll perform in the future.

Figure 1: Retirement Funds Included in Our Performance Study 

Source: T. Rowe Price. 

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, 2017 (Figure 1). 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.

T. Rowe Price believes strongly that longer time horizons provide the most meaningful measures of target date implementation, as they smooth out the effects of shorter-term factors that can produce a distorted picture of relative performance. Accordingly, our analysis focused primarily on performance over rolling five-year and rolling 10-year periods, rolled monthly.3

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.

Opening Quote Annualized excess returns were consistently positive across all time frames for all funds. Closing Quote

Figure 2: Time-Weighted Average Active Success Rates for T. Rowe Price Retirement Funds 

Figure 3: Time-Weighted Average Annualized Value Added (in Basis Points) for T. Rowe Price Retirement Funds
Fund Inceptions Through December 31, 2017 

Sources: Bloomberg Barclays, MSCI, Russell, and T. Rowe Price; data analysis by T. Rowe Price. 

Study Results

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 (Figures 2 and 3).4

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 99%). Value added was positive across all time frames (Figure 4).5
  • Security selection: Excess returns were positive in every 10-year rolling period for every RF 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. Annualized excess returns were consistently positive across all time frames for all funds (Figure 6).

Figure 4: Active Success Rates and Average 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 Average Value Added by Security Selection 

Sources: Bloomberg Barclays, Credit Suisse, J.P. Morgan, MSCI, Russell, Standard & Poorʼs, and T. Rowe Price; data analysis by T. Rowe Price. 

Figure 6: Active Success Rates and Average Value Added by Total Implementation 

Sources: Bloomberg Barclays, MSCI, Russell, and T. Rowe Price; data analysis by T. Rowe Price. 

The T. Rowe Price Approach

Target Date Strategies: The Benefits of T. Rowe Price's Strategic Investing Approach

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 visit troweprice.com/targetdate. 

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 Performance results over rolling 1- and 3-year periods for the 11 funds included in our analysis can be found at troweprice.com/targetdate.

4 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 Figure 3.

5 The out-of-benchmark allocations in T. Rowe Priceʼs combined index benchmarks may materially affect RF excess returns relative to those benchmarks.

Important Information
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 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.

The views contained herein are as of July 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.

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.

Note that past performance data throughout this material are not reliable indicators of future performance.

T. Rowe Price Investment Services, Inc., Distributor.


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GIPS® Information

T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®). TRP has been independently verified for the twenty one- year period ended June 30, 2017 by KPMG LLP. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.

TRP is a U.S. investment management firm with various investment advisers registered with the U.S. Securities and Exchange Commission, the U.K. Financial Conduct Authority, and other regulatory bodies in various countries and holds itself out as such to potential clients for GIPS purposes. TRP further defines itself under GIPS as a discretionary investment manager providing services primarily to institutional clients with regard to various mandates, which include U.S, international, and global strategies but excluding the services of the Private Asset Management group.

A complete list and description of all of the Firm's composites and/or a presentation that adheres to the GIPS® standards are available upon request. Additional information regarding the firm's policies and procedures for calculating and reporting performance results is available upon request

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