A Look at Lifecycle Funds from Vanguard, Fidelity, and T. R. Price
No mutual funds are equal, even if they track the same benchmark, and this is also true for lifecycle funds.
Lifecycle funds, also known as target date funds, are getting popular among investors who seek optimum asset allocation for their retirement investments. The idea of a lifecycle fund is that the fund’s asset allocation evolves as the fund approaches the target date. With lifecycle funds, investors leave the job of rebalancing the fund’s assets to the fund managers, who will gradually shift the fund’s investment style from aggressive (more stocks) to conservative (more bonds).
According to an article in the April issue of Financial Planning magazine, in 2006 alone, financial institutions have launched 50 lifecycle funds. As investors brace for flood of new target date funds, they also have a choice to make: which fund to invest in. In addition to those common factors when evaluating a mutual fund, such as risks, return, and costs, more attention should be paid to the fund’s asset allocation because it’s what makes a lifecycle fund a lifecycle fund. Given any target date, you are likely to find multiple fund offerings. However, their respective asset allocations could be drastically different, reflecting the fund manager’s view on market conditions and the balance between risk and return.
To see how lifecycle funds are different from each other in asset allocations, I took a look at a total of 27 lifecycle funds from Vanguard, Fidelity, and T. Rowe Price, with target dates ranging from 2010 to 2050. The stocks and bonds allocations of these funds are shown in the following plot.
Clearly, even with the same target date, the three fund families have quite different views on what should be optimum asset allocation, especially for those funds with close target date (2010 and 2015). For example, Vanguard has 54.2% in stocks and 44.6% in bonds in its 2010 fund, while Fidelity has 50.7% and 35.9%, respectively, and T. R. Price has 63.3% and 31.2%, respectively. In this case, TRP 2010 fund has nearly 10% more in equities than its Vanguard counterpart and a even larger margin over Fidelity 2010. The difference, however, becomes smaller as the fund’s time span gets longer. For 2045 target date, the allocations of stocks and bonds are: Vanguard 88.8% and 9.9%, Fidelity 86.7% and 9.1%, and TRP 88% and 7.5%, respectively.
As we know that historically, stocks provide consistently higher return than bonds. Thus, when looking at only the asset allocations of these funds, we can expect that the difference will be reflected in the funds’ performances and indeed that’s the case. As the above table show TRP funds beat both Vanguard and Fidelity in 3-year return across the board. Since every lifecycle fund uses the fund family’s in-house funds as ingredients, it will be hard to simply attribute TRP funds’ superior performances (more than 2% higher than their rivals) to their asset allocations without knowing exactly the allocations of the underlying fund elements (as indicated by the 2035 funds in which Vanguard, Fidelity, and TRP has 89%, 81.4%, and 88.6% in stocks, respectively). Using Morningstar’s instant X-ray, I get the detailed asset allocation of the three 2035 funds:
- Vanguard 2035
- Cash: 0.69
- U.S. Stocks: 71.32
- Foreign Stocks: 17.67
- Bonds: 9.89
- Other: 0.42
- Fidelity 2035
- Cash: 3.84
- U.S. Stocks: 60.93
- Foreign Stocks: 20.50
- Bonds: 13.66
- Other: 1.07
- TRP 2035
- Cash: 3.51
- U.S. Stocks: 68.33
- Foreign Stocks: 20.29
- Bonds: 6.96
- Other: 0.91
What we can see here is TRP 2035 has more foreign stock holdings that Vanguard 2035 and larger exposure in US stocks than Fidelity 2035. Could this be the difference maker?
Like selecting any other mutual fund investments, we also need to consider a fund’s costs and minimum requirement when deciding which lifecycle fund to invest. There’s no doubt that Vanguard is always the leader in providing low-cost investment options, but does not necessarily mean Vanguard funds automatically become the choice. For the above listed funds, Vanguard funds are about 0.5% less in expense ratio (ER), but they lag about 2% in performance as compared with TRP funds. In addition, Vanguard requires a minimum of $3,000 to start investing with them, while both Fidelity and TRP need $2,500 and they both waive the minimum if using automatic investment plan.
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