MONEY target date funds

Target-Date Funds Try Timing the Market

Managers of target-date retirement funds seek to boost returns with tactical moves. Will their bets blow up?

Mutual fund companies are trying to juice returns of target-date funds by giving their managers more leeway to make tactical bets on stock and bond markets, even though this could increase the volatility and risk of the widely held retirement funds.

It’s an important shift for the $651 billion sector known for its set-it-and-forget-it approach to investing. Target-date funds typically adjust their mix of holdings to become more conservative over time, according to fixed schedules known as “glide paths.”

The funds take their names from the year in which participating investors plan to retire, and they are often used as a default investment choice by employees who are automatically enrolled in their company 401(k) plans. Their assets have grown exponentially.

The funds’ goal is to reduce the risk investors take when they keep too much of their money in more volatile investments as they approach retirement, or when they follow their worst buy-high, sell-low instincts and trade too often in retirement accounts.

So a move by firms like BlackRock Inc., Fidelity Investments and others to let fund managers add their own judgment to pre-set glide paths is significant. The risk is that their bets could blow up and work against the long-term strategy—hurting workers who think their retirement accounts are locked into safe and automatic plans.

Fund sponsors say they aren’t putting core strategies in danger—many only allow a shift in the asset allocation of 5% in one direction or another—and say they actually can reduce risk by freeing managers to make obvious calls.

“Having a little leeway to adjust gives you more tools,” said Daniel Oldroyd, portfolio manager for JPMorgan Chase & Co’s SmartRetirement funds, which have had tactical management since they were introduced in 2006.

GROWING TACTICAL APPROACH

BlackRock last month introduced new target-date options, called Lifepath Dynamic, that allow managers to tinker with the glide path-led portfolios every six months based on market conditions.

Last summer, market leader Fidelity gave managers of its Pyramis Lifecycle strategies—used in the largest 401(k) plans—a similar ability to tweak the mix of assets they hold.

Now it is mulling making the same move in its more broadly held Fidelity target-fund series, said Bruce Herring, chief investment officer of Fidelity’s Global Asset Allocation division.

Legg Mason Inc says it will start selling target-date portfolios for 401(k) accounts within a few months whose allocations can be shifted by roughly a percentage point in a typical month.

EARLY BETS PAYING OFF

So far, some of the early tactical target-date plays have paid off. Those funds that gave their managers latitude on average beat 61% of their peers over five years, according to a recent study by Morningstar analyst Janet Yang. Over the same five years, funds that held their managers to strict glide paths underperformed.

But the newness of the funds means they have not been tested fully by a market downturn.

“So far it’s worked, but we don’t have a full market cycle,” Yang cautioned.

The idea of putting human judgment into target-date funds raises issues similar to the long-running debate over whether active fund managers can consistently outperform passive index products, said Brooks Herman, head of research at BrightScope, based in San Diego, which tracks retirement assets.

“It’s great if you get it right, it stings when you don’t. And, it’s really hard to get it right year after year after year,” he said.

MONEY mutual funds

“Green” Funds Think Apple is Ripe for the Picking

Aerial of the Main Building of Apple's new Cupertino campus.
Aerial of the main building of Apple's new Cupertino campus, powered by renewable energy. City of Cupertino

Apple APPLE INC. AAPL -0.8641% — which has been criticized in the past for greenhouse gas emissions, the use of toxic materials in its products, and working with suppliers who hire underage workers — has adopted a slew of new green policies recently and now earns better marks from groups such as Greenpeace.

For managers of environmentally aware mutual funds, the recent improvements bolster the appeal of a company whose shares are considered green in another way — by making money.

AAPL Chart

AAPL data by YCharts

While the iPhone maker’s stock is up more than 15% this year, Apple shares are still considered attractively priced, given the company’s massive earnings. This, plus improving environmental performance make Apple “the one stock you just can’t ignore,” says Anthony Tursich, senior portfolio manager of the Portfolio 21 Global Equity Fund, a so-called green fund that bought Apple in 2011 after the company began providing more emissions data.

Tursich’s biggest holding is another tech giant, Google GOOGLE INC. GOOG 0.3356% , which he bought only after the search engine company made progress on renewable energy.

Environmental fund managers may be broadening their shopping lists in part because they have more money to deploy: For the 12 months ended April 30, investors put $1.9 billion of new money into the 72 funds tracked by Lipper that use environmental criteria in their investment decisions.

That’s still tiny relative to the $247.6 billion that went into all U.S. equity funds, but it represents a 5% inflow that Lipper research head Tom Roseen said was significant. The bulk of the new money, more than $1 billion, went into the dominant $9.5 billion Parnassus Core Equity Fund, Lipper said.

Apple is the top holding of the Parnassus fund, which bought most of the shares in 2013, the year the fund rose 34% and beat 72% of peers, according to Morningstar. Through June 13 the fund was up about 7% in 2014, beating 87% of peers.

Apple is also the top holding of the Calvert Equity Portfolio and the Green Century Balanced Fund, and is the third-largest stock in the Pax World Balanced Fund, according to the funds’ latest filings.

Fund managers cited a mix of reasons for warming up to Apple, including reforms pushed by Chief Executive Tim Cook and the stock’s outlook. It is up 15% in 2014 on enthusiasm for its iPhones and other pending products, as well as a stock split and a dividend increase.

In the past, Apple had taken hits from activist groups like Greenpeace — which in 2010 called it “very weak” on climate and emissions matters — and has faced scrutiny over the hiring of children at factories of suppliers that make its products.

It also earned a bottom score of “4” on its carbon footprint from the Boston sustainability advocacy group Ceres. Ceres senior manager Kristen Lang said Apple had not released enough information to get a better score, such as making public its targets for reducing greenhouse gas emissions. Google received a higher score of “2” from Ceres, which praised its spending on renewable energy.

Among other things, Greenpeace said Apple was moving too slowly to stop using hazardous materials like polyvinyl chloride plastic — often used to insulate electrical cables — and brominated flame retardants in its products. Critics worried both materials could be released from products during use or when older computers or power cords are disposed in landfills.

In recent years, however, Apple has made changes and improved its image with environmentalists. In April, Greenpeace called Apple a leader for things like powering data centers with solar arrays, wind farms and water. Ceres’ Lang said Apple might get a higher score currently based on steps it has taken since data for her groups’ report was collected last fall.

In addition, Apple this year reported a sharp decline in number of underage workers hired at its supplier facilities abroad.

Apple — whose board includes environmentalist and former U.S. Vice President Al Gore — also last year hired former U.S. Environmental Protection Agency head Lisa Jackson to oversee areas like cutting toxins from its products.

Asked about the Ceres score, Apple spokesman Chris Gaither said the company powers 94% of its global corporate facilities with renewable energy now, up from 35% in 2010. He added: “Of course, the cleanest energy is the energy you never use, and that’s why we’ve made efficiency such an important feature in Apple facilities and products.”

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