A Powerful New Approach to Target Date Fund Evaluation | Capital Group

A Powerful New Approach to Target Date Fund Evaluation

November 2017

A Powerful Approach to Target Date Fund Evaluation

American Funds Target Date ProView℠ tool provides a fast, powerful online platform to help analyze and compare target date fund series for a defined contribution retirement plan. It also provides you, as a retirement plan intermediary, with a way to differentiate yourself and increase the value you can deliver to your clients. 

The Target Date ProView℠ approach combines the traditional evaluation process with detailed analysis to examine four critical aspects of a target date series:

  • Glide path
  • Risk
  • Returns
  • Expenses

By pairing traditional methods with deeper-dive metrics, fiduciaries can examine a specific target date series more closely and effectively. Also, by documenting the process, a fiduciary can demonstrate a commitment to due diligence, and give plan sponsors and participants confidence in the value of their target date series.

Dive Deeper Into the Glide Path

Examining a glide path’s percentage in equity and fixed-income gives only a limited picture of a series’ risk exposure.

Target Date ProView makes it easier than ever to examine the nature of a series’ equity and fixed-income exposure over time. That way, you can quickly see if the manager takes an evolving approach to risk within that allocation, and if so, how they execute that approach.

Volatility Over Time – Equity Only

For illustrative purposes only.

Some managers adjust the components of their equity and fixed-income holdings over time to suit participants’ evolving needs — for example, by decreasing the equity portfolio’s exposure to higher volatility stocks while increasing its exposure to lower volatility stocks. By contrast, many target date managers simply maintain static weightings within the equity portfolio across the glide path.

Dive Deeper Into Risk Metrics

For a more holistic view of the risks facing participants, Target Date ProView examines a series’ upside, downside and overall capture ratios.

Upside and downside capture ratios measure how a fund has fared during rising and declining markets – and can offer a unique perspective when evaluated together. The overall capture ratio shows both upside and downside ratios in a single data point and reveals the balance between potential risk and return. An overall capture ratio greater than one indicates a fund's historical upside has exceeded its downside.

The Deeper View of Risk: Capture Ratios

For illustrative purposes only.

Dive Deeper Into Returns

Comparing a target date series’ returns to peer returns over various time periods should be only the first step in evaluating results. Target Date ProView lets you see how a fund series achieved its returns.

Plotting returns against standard deviation provides an intuitive, visual representation of how much risk the series has taken to achieve its results.

The Deeper View of Returns: Returns and Volatility

For illustrative purposes only.

This approach can help identify whether the source of relatively strong returns was superior management or simply a greater appetite for risk.

Dive Deeper Into Expenses

Cost isn’t the only consideration when it comes to fund expenses. Also examine the value participants receive for the fees they pay.

Target Date ProView provides a fast way to evaluate value by juxtaposing a fund series’ expense ratio to its returns, then comparing the results to those of the fund’s peers.

For illustrative purposes only.

This analysis can uncover series that have justified higher fees by consistently delivering higher returns (in excess of those fees) over time. Remember that even small differences in costs and returns can have outsized impact on participants’ savings when compounded over decades.

Likewise, it can uncover lower-cost funds that consistently have underperformed their peers — undermining the benefit that participants might receive from lower expenses.

Diving deeper into these four key considerations provides greater insight into a target date series, helping make a selection that better meets plan objectives and participants’ needs. Financial professionals who have used Target Date ProView have said that the web-based tool makes it fast and easy to conduct this level of due diligence and document the results, both to serve existing clients and to capture new opportunities.

Start a deeper dive evaluation today or contact your American Funds representative to learn more.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the mutual fund prospectuses and summary prospectuses, which can be obtained from a financial professional, and should be read carefully before investing. Similar information about collective investment trusts can be obtained from Capital Group or participants’ plan provider or employer. 

Each target date portfolio is composed of a mix of underlying funds and is subject to the risks and returns of those funds. Underlying funds may be added or removed during the year. Although the target date portfolios are managed for investors on a projected retirement date time frame, the allocation strategy does not guarantee that investors' retirement goals will be met. The target date is the year that corresponds roughly to the year in which an investor is assumed to retire and begin taking withdrawals. Investment professionals manage the portfolio, moving it from a more growth-oriented strategy to a more income-oriented focus as the target date gets closer. Investment professionals continue to manage each portfolio for approximately 30 years after it reaches its target date. 

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.