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The T. Rowe Price Approach

How Our Strategic Investing Approach Stacks Up Against Passive Portfolios

Discipline has brought long‑term rewards for clients.

Executive Summary

  • 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 

Study Results

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 

  Rolling Periods
  1-Year 3-Year 5-Year 10-Year
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

  Rolling Periods
  1-Year 3-Year 5-Year 10-Year
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.

Study Methodology

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. 

Opening Quote We believe the value added by our target date implementation can meaningfully enhance retirement outcomes for investors. Closing Quote

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.

How Our Strategic Investing Approach Stacks Up Against Passive Portfolios

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
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.

Important Information
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.

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.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2019. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

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.
© 2019 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

201903‑751280 

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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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