Morningstar Advisor - June/July 2010 - 26

Gray Matters

Average Underlying Star Rating
Target-Date Series Morningstar Rating # Funds Architecture Target-Date Series Morningstar Rating # Funds Architecture

series did not have higher average assetweighted Morningstar Ratings than those of closed-model series. As a final test, we looked to the latest overall Morningstar Target-Date Fund Series Ratings, which we issue to 20 series. These ratings cover quantitative and qualitative aspects of a series’ performance, fees, management quality, and stewardship practices. Among the 20 series, seven include subadvisors not affiliated with the series’ advisor. None of those seven series earned a Top rating.
A Difficult Art

Manning & Napier Rtrmt Target American Funds Trgt Date Rtrmt Franklin Templeton Rtrmt MainStay Retirement MFS Lifetime PIMCO RealRetirement Putnam RetirementReady BlackRock LifePath American Century LIVESTRONG ING Solution T. Rowe Price Retirement State Farm Lifepath Nationwide Target Dest Schwab Target John Hancock Lifecycle

5.00 4.06 3.94 3.81 3.67 3.62 3.52 3.48 3.47 3.47 3.45 3.44 3.40 3.30 3.31

4 20 15 20 17 9 20 4 7 15 24 15 7 11 115 34

Closed Closed Closed Mixed Closed Closed Closed Closed Closed Closed Mixed Closed Open Open Mixed Mixed

Fidelity Freedom TIAA–CREF Lifecycle AIM Balanced-Risk BlackRock Lifecycle Prep MassMutual Select Dest Vantagepoint Milestone Columbia Rtrmt Portfolios Principal LifeTime Vanguard Target Rtrmt Guidestone Funds MyDestination DWS LifeCompass Fidelity Advisor Freedom Russell LifePoints Trgt Date Oppenheimer LifeCycle Goldman Sachs Rtrmt Str RiverSource Rtrmt Plus

3.26 3.23 3.22 3.20 3.20 3.18 3.04 3.02 3.00 2.95 2.90 2.88 2.82 2.79 2.59 2.33

16 11 23 19 32 8 12 28 5 10 10 53 11 8 15 10 9

Closed Closed Mixed Closed Mixed Open Mixed Mixed Closed Open Open Closed Closed Open Closed Closed Closed

JPMorgan SmartRetirement 3.54

Seligman TargetHorizon ETF 2.98

We were unable to compute average star ratings of four series that appear in “Best and Worst Three-Year Risk-Adjusted Return Rank” table because they invest directly in securities. Data as of Dec. 31, 2009.

Morningstar Overall Target-Date Ratings and Architecture
Target-Date Series Architecture Target-Date Series Architecture

Several factors may explain why open-architecture target-date series haven’t demonstrated a performance edge. For one, it can be expensive to hire subadvisors, and the series’ expense ratio may act as a drag on performance. Also, several open-architecture series feature aggressive glide paths that performed dismally in 2008’s downturn. Finally, it’s not easy to choose and combine subadvisors that together will consistently outperform. Such portfolio construction is an art that’s perfected over years and decades. While the data does not suggest open-architecture series have a performance advantage, it also doesn’t seem to have a consistent disadvantage. That said, one open-architecture standout is Vantagepoint, which has benefited from strong manager selection, a relatively conservative glide path, reasonable (though recently increased) fees, and a stellar and experienced investment culture. Recently, target-date providers have introduced new open-architecture target-date series. As target-date fund performance records lengthen, open-architecture series may demonstrate superiority, but for now, Morningstar can’t make a strong argument in favor—or against—this open-architecture target-date series’ management model. K
Josh Charlson is a senior mutual fund analyst with Morningstar.

Top

Below Average

American Funds Trgt Date Rtrmt American Century LIVESTRONG T. Rowe Price Retirement Vanguard Target Rtrmt
Above Average

Closed Closed Closed Closed

AllianceBernstein Rtrmt Str DWS LifeCompass Fidelity Advisor Freedom ING Solution Principal LifeTime Putnam RetirementReady

Closed Closed Closed Mixed Mixed Closed

JPMorgan SmartRetirement Vantagepoint Milestone Wells Fargo Advantage DJ MassMutual Select Dest
Average

Closed Open Open Mixed
Bottom

Oppenheimer LifeCycle

Closed

Fidelity Freedom John Hancock Lifecycle MFS Lifetime Schwab Target TIAA–CREF Lifecycle

Closed Mixed Closed Mixed Closed

Of the 20 target-date series, 13 used closed architectures, two used open architectures, and five used a mix. Data as of Dec. 31, 2009.

26 Morningstar Advisor June/July 2010

Morningstar Advisor - June/July 2010

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