Target Date Funds: Still Off Target?
Marc Fandetti (Meketa Investment Group) | March 6, 2013
This article examines briefly the performance and composition of “shorter-dated” target date (“TD”) funds, defined by the author as those intended for participants within a dozen years of, or already in, retirement. Morningstar, which tracks 111 such funds, is the source of all data used. Such funds performed worse in the severe market crunch of 2008 – far worse in some cases – than investors were likely expecting. This is now widely recognized. More importantly – and disturbingly – shorter dated TD funds remain too aggressively invested in most cases, delivering performance (and exhibiting risk), on average, in line with pension funds.
Since pension funds likely have a longer-term investment horizon than most shorter dated TD fund investors, the average shorter-dated TD fund is almost certainly more aggressively invested than the average near-retiree/retiree can tolerate. However unlikely the prospect of a substantial stock market decline may seem in the exuberant present, the potential for large stock market losses remains. The next “bear market” will make retirement unattainable, permanently, for many.
A quick survey of shorter-dated TD funds reveals that there are disappointingly few choices for investors at or in retirement and seeking a relatively conservative TD option. Plan sponsors should consider alternatives, such as “custom” TD funds, when the shorter-dated TD fund component of a TD fund manager’s offerings exhibit pension-fund like risk and return.
Housing Starts Rebound In February
The trend is still the business cycle’s friend when it comes to residential construction activity. Housing starts rebounded modestly in February, rising 0.8% to 917,000 on a seasonally adjusted annual basis, the Census Bureau reports. The slight gain follows January’s hefty 7.3% decline. In contrast to the volatility of the monthly data, the year-over-year comparison for starts remains strong, as today’s update shows. A similar story applies to newly issued housing permits, which suggests that residential construction activity will continue to advance in the spring.
Q1:2013 US GDP Nowcast Update | 3.19.2013
US GDP is projected to increase by 3.1% in 2013’s first quarter, according to the latest update of The Capital Spectator’s average econometric nowcast. That’s up sharply from the previous 2.0% nowcast for Q1, published on February 26. (GDP percentage changes are quoted as real seasonally adjusted annual rates.)
US Economic Profile | 3.18.13
The future is hazy for the US economy, perhaps more so than usual, but the recent past is relatively clear and encouraging. A broad set of economic and financial indicators–defined by the Economic Trend Index (ETI) and the Economic Momentum (EMI) Index–continues to signal growth. In addition, an econometric projection of the indicators suggests that a relatively upbeat profile for the US economy is likely to roll on for the immediate future.
Housing Starts: February 2013 Preview
Housing starts are expected to rise 5.0% in February vs. the previous month in tomorrow’s update, according to The Capital Spectator’s average econometric forecast. That compares with an 8.5% decrease reported for January (seasonally adjusted annual rate). The Capital Spectator’s projected gain for February is above the expected increases in several consensus forecasts drawn from surveys of economists.
Book Bits | 3.16.13
● The Dividend Imperative: How Dividends Can Narrow the Gap between Main Street and Wall Street
By Daniel Peris
Q&A with author via The Globe and Mail
Q: You show that dividend payout ratios – dividends as a percentage of profits – for S&P 500 companies have fallen to 30 per cent, on average, from 50 per cent three decades ago. Why?
A: There are a lot of reasons. The one that I highlight is the relentless decline in interest rates. A lower interest rate allows companies to get away with offering a lower yield and still attract capital.
Q: And that’s a problem because …?
By taking their dividend payout ratios so low over the past three decades they have made investing in their companies to be a speculative endeavour rather than to be a business investment. To make money, you have to hope to sell the stock for a profit. People no longer view themselves as stakeholders in businesses they use on an everyday basis, but instead as speculators in the stock.
Industrial Production Rebounds In February
Today’s report on industrial production for February deals another blow to analysts who insist that the US economy is in imminent danger of slipping into a recession or (even more dubious) that the business cycle has already slipped off the edge. Indeed, industrial output last month accelerated, rising 0.7% in February—the best monthly gain since November. The cyclically sensitive manufacturing slice of industrial activity also enjoyed a strong month, advancing 0.8% over January’s level. Is all this misleading us about the true nature of the trend? Perhaps, but the numbers suggest otherwise once you consider that the annual change in industrial production continues to chug along at a moderate pace, rising a bit faster at a 2.5% gain for the year through last month vs. the 2.3% year-over-year rate for January.
Rebalance Periodically, Review Frequently
The risk premium for a broadly diversified, unmanaged portfolio of asset classes is expected to fall in the years ahead. Can this trend be offset by working smarter and making better rebalancing decisions? In theory, yes. In practice, only a minority of investors can avail themselves of benchmark-beating results in the long run. True for individual asset classes, true for asset allocation. That’s the nature of the arithmetic of active management. But if there’s any chance for success on this front, most of the strategic intelligence for improving results will come from within your portfolio, as I discussed a few weeks ago. Carefully monitoring the fluctuations in your asset allocation doesn’t insure that you’ll earn a higher risk premium, but it’s a lot harder (impossible?) to enhance results if you don’t fully exploit this information for managing the portfolio.
Weekly Jobless Claims Closing In On Five-Year Low
Last week’s decline in initial jobless claims puts the data within a statistical hair of a five-year low. That’s a bullish sign for the labor market and, by extension, the economy. Indeed, the latest dip in new claims strengthens last week’s encouraging news of private nonfarm payrolls growth in February. Some analysts continue to press the case that the US economy is in recession, or is slipping into darkness as we speak. But the numbers say otherwise, starting with the labor market, which continues to grow at a modest pace.
US Industrial Production: Feb 2013 Preview
Tomorrow’s report on industrial production for February is projected to post a 0.4% gain, according to The Capital Spectator’s average econometric forecast. The expected gain compares with a slight 0.1% decline in January. Meanwhile, the Capital Spectator’s average February projection is at the low end of consensus forecasts from economists.