Target date benchmarks miss the mark

CHICAGO — Despite a surge in popularity among investors, target date mutual funds continue to operate without adequate benchmarks to help financial advisers evaluate whether their performance is up to snuff. At least 34 target date funds have been launched this year, according to Morningstar Inc. in Chicago. Assets in target date funds totaled $153 billion at the end of June, up 71% from $89 billion 12 months earlier and 955% from $14.5 billion at the end of 2002, according to Financial Research Corp. in Boston. Even so, many advisers are baffled over what to use as yardsticks for gauging performance. “The problem with all of these products is that we don’t have a way we’re comfortable with to measure them objectively from the standpoint of being fiduciaries,” said Henry Schwarzberg, a registered investment adviser and attorney with InterServ LLC in Mobile, Ala. “These funds are a moving target, and they belie measurement.” “It’s frustrating,” said Mike DeVine, vice president and senior financial adviser at WealthTrust in Scottsdale. Ariz. “It’s hard to get a benchmark.” Financial advisers — who some say ultimately will be the ones to force the development of better benchmarks — are not the only ones who are stumped. Vanguard report The Vanguard Group Inc. in Malvern, Pa., tomorrow will release a report looking at the dilemma. That report suggests two possible ways of benchmarking that the industry should consider.
“We’re hoping this will generate some discussion in the industry, and there might be other benchmarks,” said Ellen Rinaldi, who leads the investment counseling and research group at Vanguard. “We’re not sure these are the right benchmarks. We’re just starting the conversation. No one’s tried it before.” The problem is that most target date funds are measured against their peers. That method, however, fails to take into account differences in asset allocation within the funds. Vanguard is proposing that two additional benchmarks be used. The first would measure performance against the return needed by most investors in order to amass enough assets for retirement. “Existing benchmarks provide no sense of the funds’ success in meeting this objective,” according to the report. “It is almost as if a tour guide agreed to take a traveler from A to B but never clarified how the pair would get to B or even precisely where B was. The traveler would be lost.” The second would measure performance against the investment manager’s return expectations. A better mousetrap? Others are also grappling with ways to measure target date funds. In August, 401(k) Advisors Inc. in Aliso Viejo, Calif., launched the Scorecard System to measure the performance of target date funds. The company uses customized benchmarks to measure each fund. It also redefines peer groups for asset allocation funds, based on their variation from expected returns rather than measuring the performance against traditional industry groups. Companies that provide tracking mechanisms agree that there needs to be more detailed comparison for target date funds. New York-based Standard & Poor’s is looking into creating target date benchmarks, said David Guarino, a spokesman. “We believe there’s clearly a need for benchmarks,” he said. “We’re actively pursuing opportunities, and there’s nothing to announce at this point.” Lipper Inc. in New York also is scrambling to develop a better measure of performance for target date funds. “People want to know how their funds are doing against a standardized system, said Tom Roseen, a Denver-based Lipper senior research analyst. Morningstar, however, isn’t trying to develop a new benchmark for target date funds. “It’s difficult to get a handle on benchmarking, because funds with the same target date often have very different asset allocation, depending on which company they’re from,” said Greg Carlson, a mutual fund analyst at Morningstar. There are factors other than performance to consider when evaluating target date funds, he said. Those factors include expenses and asset allocation, Mr. Carlson said. Nevertheless, the marketplace should demand new benchmarks, said Chip Castille, head of defined contribution product development for Barclays Global Investors, a San Francisco-based subsidiary of Barclays PLC of London. “The peer group benchmark is useless,” he said. Ultimately, the push for improved benchmarks will come from advisers, said John Prestbo, editor and executive director of New York-based Dow Jones Indexes, which developed its own target fund benchmark in 2005. “When you talk with fund companies, they want a benchmark that mirrors their own mix, except not as good,” he said. “So they’ll never agree. I think it’ll happen not as a result of great diplomacy from the fund community but rather imposed from financial advisers.” Lisa Shidler can be reached at lshidler@crain.com. “The problem with all of these products is that we don’t have a way we’re comfortable with to measure them objectively from the standpoint of being fiduciaries.” Henry Schwarzberg Registered investment adviser InterServ