The Trouble with Target Date Funds

TDFs: One Size Does Not Fit All

Target Date Funds don’t account for differences in individual circumstances among investors, even when much of the pertinent data is readily accessible.

The below illustration shows three 50 year-olds with three very different financial situations. It shows how the PRO solution would determine their asset allocation compared to an average TDF which would lump three very different individuals into the same asset allocation.


Looking inside Target Date Funds:

  • Inefficient portfolios which on average are constructed of over 20 sub-funds and contain over 2,000 equity holdings resulting in a very low tracking error, index-like portfolio priced more like an actively managed strategy.
  • High degree of security overlap - on average 35% of underlying securities are held in multiple funds resulting in a very uncoordinated portfolio management.
  • Uncoordinated trading as the same holdings are bought and sold by different sub funds.
  • Portfolios tend to have a home bias with an average of only 25% allocated to international equity markets, which now represent nearly 50% of the world’s equity investment universe.
  • Portfolios often lack tactical decision-making and employ static allocations to fixed income and equities, further limiting ability to control risk and generate excess return.

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