The combination of a weak outlook for bonds and research that investors close to retirement are OK with more risk leads Fidelity to tilt its target date funds more toward stocks.
Fidelity Investments is increasing the stock allocation across its target date funds after research found that investors are OK with more risk in retirement accounts and the outlook for bonds dims.
The biggest reason for the change was new research Fidelity conducted on how 401(k) plan participants reacted to the stock market plunge in 2008, the worst decline since the Great Depression. The firm's research uncovered no discernible change in the 401(k) participation rate or in fund turnover across the 12 million participants in its record-keeping platform.
“We looked at investor behavior in 2008 and our conclusion was that people can tolerate a lot more equities than we thought in their retirement planning,” said Bruce Herring, group chief investment officer of the global asset allocation division within Fidelity.
The most change will be in Fidelity's longer-dated target date funds. Freedom Fund investors will now hold a 90% allocation to stocks until they are about 20 years away from their retirement date. Currently, they invest in less than 75% equities at the same point.
“To start de-risking 25 years before the retirement date is too conservative,” Mr. Herring said. “We've never had a drawdown that hasn't been fully recovered within 19 years.”
Near-term target date funds will also see a boost in equities. The Fidelity Freedom 2020 Fund (FFFDX) will increase its stock holdings to 61%, from 53%, and decrease its bond allocation to 39%, from 47%.
Fidelity's outlook for the bond market played a role in the increased stock holdings.
Fidelity's capital market assumption team looks at 20 years of historical returns and current valuations to forecast asset class returns. The team's outlook for stocks is largely in line with historical averages but with the today's interest rates, it's not expecting bonds to perform the way they have.
“We think it's unrealistic the next 20 years will have the same returns of the last 20 years,” Mr. Herring said.
The alterations to the glide path are the latest change to the Fidelity target date funds as the mutual fund giant fights to hold on to its top spot in the target date fund world.
Late last year, Fidelity added new funds managed by superstar stock managers Will Danoff and Joel Tillinghast to the target date funds' underlying holdings. They each manage around 7% of the domestic stock allocation.
Fidelity target date funds are the largest in the industry, with $170 billion in assets, but its biggest competitor is catching up quickly.
The Vanguard Group Inc.'s $124 billion target date fund lineup had organic growth of 21% in 2012, more than double the rate of the Fidelity target date funds, according to Morningstar Inc.
Combined, the two fund companies manage approximately 58% of all target date fund assets.
