- We found that 11 of our Retirement Funds beat their passive competitors over various rolling periods from inception through December 31, 2018, net of fees.
- We compared the performance of each Retirement Fund with a custom composite index based on the performance of passive funds with comparable target dates.
- The custom composites were based on the oldest share class offered by each competing passive target date fund. The results were equally weighted by fund.
- Excess returns relative to the passive competitor indexes were positive, on average, across 1‑, 3‑, 5‑, and 10‑year rolling time periods for all 11 funds.
When selecting a target date fund, defined contribution (DC) plan sponsors and individual investors can choose from both passively managed strategies—those that invest in an underlying basket of index funds—and actively managed strategies, which seek to enhance returns through security selection and/or tactical asset allocation moves to exploit potential short‑term market opportunities.
When considering active target date funds, investors may wonder if an active management approach justifies the higher management fees that such funds typically charge relative to their passive competitors.
(Fig. 1) Value Added by T. Rowe Price’s Target Date Process
Relative to Passive Competitor Indexes, Fund Inceptions Through December 31, 2018
Sources: T. Rowe Price and Morningstar. ©2019 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. All data analysis by T. Rowe Price.
To demonstrate that T. Rowe Price’s strategic investing process has created value for our clients, we recently examined the relative performance of 11 of our RFs. These 11 RFs held more than 98% of the Retirement Fund assets managed by the firm as of December 31, 2018. The focus of our study was on performance relative to the passive target date strategies offered by our competitors.2
Relative to the passive competitor indexes, the value added by T. Rowe Price’s active RFs was both strongly positive and relatively stable across different time frames (Figure 1). Performance for individual RFs also was strongly positive, especially over the longer term (Figures 2 and 3):
- All nine of the RFs with 10‑year track records included in the study outperformed their passive competitor indexes in 100% of rolling 10‑year periods since inception.
- Eight of the 10 funds with five‑year track records outperformed their passive competitor index in 90% or more of all rolling five‑year periods since inception.
- All 11 RFs outperformed their passive competitor index in 79% or more of all three‑year rolling periods since inception.
- Annualized excess returns relative to the passive competitor indexes were consistently positive, on average, across all time frames for all RFs.
(Fig. 2) Active Success Rates vs. Equally Weighted Passive Competitor Indexes
Fund Inceptions Through December 31, 2018
|Retirement 2010 Fund||79%||84%||83%||100%|
|Retirement 2015 Fund||74||81||88||100|
|Retirement 2020 Fund||78||83||92||100|
|Retirement 2025 Fund||74||80||93||100|
|Retirement 2030 Fund||79||91||99||100|
|Retirement 2035 Fund||71||90||99||100|
|Retirement 2040 Fund||83||99||100||100|
|Retirement 2045 Fund||73||89||100||100|
|Retirement 2050 Fund||71||98||100||100|
|Retirement 2055 Fund||80||99||100||N/A|
|Retirement 2060 Fund||67||79||N/A||N/A|
Sources: T. Rowe Price and Morningstar (see Fig. 1). All data analysis by T. Rowe Price.
(Fig. 3) Excess Returns vs. Equally Weighted Passive Competitor Indexes
Percentage Points, Fund Inceptions Through December 31, 2018
|Retirement 2010 Fund||2.30||1.64||1.45||2.18|
|Retirement 2015 Fund||1.42||1.08||1.12||0.81|
|Retirement 2020 Fund||2.23||1.71||1.57||1.88|
|Retirement 2025 Fund||1.70||1.25||1.25||0.90|
|Retirement 2030 Fund||2.10||1.69||1.58||1.86|
|Retirement 2035 Fund||1.39||1.04||1.08||0.84|
|Retirement 2040 Fund||1.57||1.41||1.43||1.69|
|Retirement 2045 Fund||1.07||0.85||0.98||0.74|
|Retirement 2050 Fund||1.07||1.11||1.16||0.88|
|Retirement 2055 Fund||1.09||0.99||1.08||N/A|
|Retirement 2060 Fund||0.49||0.37||N/A||N/A|
Sources: T. Rowe Price and Morningstar (see Fig. 1). All data analysis by T. Rowe Price.
To represent the passive alternatives to T. Rowe Price’s actively managed target date strategies, we used a series of composite performance indexes consisting of passively managed target date funds identified by Morningstar, a leading mutual fund data provider, in its annual Target‑Date Fund Landscape Report. These indexes included passive funds offered by major target date providers, such as the Vanguard Group, Fidelity Investments, BlackRock, Inc., and Wells Fargo & Company.3
The comparison index for each T. Rowe Price RF included the passive funds in the Morningstar universe with the same target date as the RF. The returns on these indexes were based on an equally weighted average of the oldest share class offered by each competing passive fund. The asset weights for all these funds as of December 31, 2018, can be found in Figure A3 in the appendix.
While in the same category, there may be material differences among target date funds, including fees, expenses, and the portfolio mix of stocks, bonds, and other assets. Target date funds typically change their asset class allocations over time according to a predetermined glide path. Security selection within the underlying investments that make up those allocations can vary greatly between fund families and may have a material impact on fund performance.
Retirement Fund relative performance was measured across rolling 1‑, 3‑, 5‑, and 10‑year periods (rolled monthly) from each fund’s inception date through December 31, 2018. Thus, the older the RF, the more rolling performance periods it had in each time frame studied.
Two performance measures were calculated for each RF:
- Active success rate: The percentage of total rolling periods in which the RF outperformed its passive competitor index.
- Excess return: The return for each RF relative to its passive competitor index, averaged across all rolling performance periods in a given time frame.
To provide a high‑level summary of the relative effectiveness of T. Rowe Price’s target date process, we also calculated performance averages covering the 11 RFs in the study (Figure 1). These averages were time‑weighted based on the percentage of the total rolling performance periods in each time frame provided by each RF.
Retirement Funds Excluded From the Study
One T. Rowe Price RF—the Retirement 2005 Fund—was excluded from the study entirely because it had only one passive competing fund in the Morningstar universe over the one‑, three‑, and five‑year rolling periods since its inception and none over 10‑year rolling periods. Ten‑year performance for the Retirement 2055 Fund was excluded from the study because we could not identify a comparable passive competitor in the Morningstar universe.
The Retirement 2060 Fund, which began operations in June 2014, was included in the study but had no 5‑ or 10‑year performance periods as of December 31, 2018.
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.4 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.5 Significantly, many of our analysts go on to become portfolio managers, which we believe creates a strong foundation on behalf of our clients.
Past performance is not a reliable indicator of future performance.
1 Averages were time‑weighted based on the percentage of total rolling performance periods in each time frame provided by each RF.
2 The performance of active target date funds reflects both the glide‑path mix and the value added or subtracted through security selection and/or tactical allocation. For more information on the T. Rowe Price funds used in this study, please visit troweprice.com.
3 More details on the study methodology can be found in the appendix. For a list of the funds included in the study and their inception dates, please see Figure A1 in the appendix. The number of rolling performance periods in each time frame for each fund are shown in Figure A2 in the appendix.
4 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.
Call 1‑800‑225‑5132 to request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and other information 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 funds' 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.
Source for Morningstar data: ©2019 Morningstar, Inc. All Rights Reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
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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.
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