How Our Strategic Investing Approach Stacks Up Against Passive Portfolios

When selecting a target date fund, defined contribution 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.

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 Retirement Funds (RFs). These 11 RFs held almost 96% of the RF assets managed by the firm as of December 31, 2022. The focus of our study was on performance relative to the passive target date strategies offered by our competitors.³

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 10 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 11 funds in the study outperformed their passive competitor index in 95% or more of rolling five‑year periods since inception.
• All 11 RFs outperformed their passive competitor index in 80% or more of 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.

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 Strategy Landscape report. These indexes included passive funds offered by major target date providers, such as The Vanguard Group, Fidelity Investments, BlackRock, Inc., and State Street Corporation.⁴

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, 2022, can be found in Figure A3 in the appendix.

While they are 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.

RF relative performance was measured across rolling 1‑, 3‑, 5‑, and 10‑year periods (rolled monthly) from each fund’s inception date through December 31, 2022. 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. A positive success rate for a fund was defined as achieving a higher return than the relevant passive competitor index in more than 50% of all periods included in the study.
• 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

Two T. Rowe Price Retirement Funds—the Retirement 2005 Fund and the Retirement 2065 Fund—were excluded from this study. The Retirement 2005 Fund had a limited number of passive peer constituents in the Morningstar universe. The Retirement 2065 Fund incepted on October 13, 2020, and, thus, had an extremely limited performance track record. The Retirement 2060 Fund, which began operations in June 2014, was included in the study but had no 10-year performance periods as of December 31, 2022.

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 prior to the coronavirus pandemic, over 550 of our investment professionals went 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 enabled them to ask the right questions to get a deeper understanding of where a company stood and where they thought it could go in the future. During the pandemic, these research activities are being done virtually.

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.