How Cautious Target-Date Funds Navigated the Debt-Ceiling Crisis
As the debt-ceiling crisis unnerved markets last summer, target-date funds sank. During the third quarter of 2011, funds with maturity dates of 2016 to 2020 lost 9.6 percent, according to Morningstar. It was an uninspiring showing for the target funds, which are designed to serve as stable choices for 401(k) and other retirement accounts.
But not every fund suffered. For the period, Invesco Balanced-Risk Retirement 2020 (AFTAX) gained 2.3 percent. The Invesco fund stayed afloat by following a careful strategy that involves holding a big fixed-income stake. Other cautious funds that excelled in the downturn include Allianz Global Investors Solutions 2020 (AGNIX), John Hancock2 Retirement Choice at 2020 (JRWOX), and Wells Fargo Advantage Dow Jones Target 2020 (STTRX).
Holding diversified mixes of stocks and bonds, target-date funds seek to offer portfolios for savers who will retire around certain dates, such as 2030 or 2050. As the retirement date approaches, the funds gradually shift to fixed income. While the average fund in the 2020 category keeps half its assets in cash and bonds, the cautious funds have most of their portfolios in fixed income.
The conservative strategies aim to attract plan sponsors that worry about preserving assets in erratic markets. So far the cautious group remains small; most plan sponsors prefer choices with bigger equity allocations. Managers of the cautious funds admit that they may underperform in bull markets. But in recent years, the conservative funds have excelled by avoiding big losses.
Among the least volatile choices is Invesco......