In February of 2010 I posted “What Does My Fidelity Target Date (Freedom) Fund Invest In? “ It is time to update this analysis.
Using the same methodology as the last post, I combed through each of the individual Fidelity Freedom funds and made a list of their underlying holdings. The Fi360 Toolkit which rates funds based on an 11 point criteria was used to review the underlying funds:
• Fund inception date (at least three years)
• Manager Tenure (min. 2 years)
• Minimum fund size
• 2 measures relating to fund investment style and asset composition
• Expense ratio
• 2 measurements of risk-adjusted return
• Trailing 1,3,5 year returns
Of the 23 non-money market funds used inside the Freedom Funds (all rankings as of June 30, 2011):
• One of the funds received the highest ranking of 0. This means no deficiencies, they passed all criteria.
• An additional three funds earned a score ranging from 1-25 indicating that they passed most of the criteria. This would indicate that these funds rank in the top 25% of all funds in their peer group with enough data to be ranked.
• Three funds had scores ranging from 26-50 indicating that they did not pass in a couple of areas but overall rank in the top half of their respective peer groups based upon the ranking criteria.
• Three of the funds had a ranking in the 51-74 range indicating that they were deficient in several of the criteria and overall place in the lower half of their peers with enough history to be ranked.
• One fund had a score in the bottom quartile of the ranking meaning that it was deficient in most areas and ranked in the bottom 25% of its peers. A ranking in this range indicates that strong consideration should be given to replacing such a fund.
• Twelve of the funds did not have enough history to be ranked. These funds are all Fidelity Series funds. This appears to be a new group of funds that Fidelity has designed for use in their Freedom Funds. These may ultimately prove to be good funds over time, but as an advisor I am generally loath to invest client money in new, untested funds unless there is a compelling reason to do so. In looking at the returns posted by these unranked funds, the results are middling at best.
• Noticeably absent from the underlying funds within the Freedom Funds are any of Fidelity’s low cost core index funds covering areas such as the S&P; 500; total domestic stock market; international equities; or their total bond market index fund. These are by and large solid, low cost holdings. Also absent are several top Fidelity funds such as Contra, Low-Priced Stock, and others.
Reviewing the overall performance of the 12 Freedom Funds compared to their peers in the Fi360 rankings:
• One fund received 0 the highest score available
• Three of the funds received scores ranging from 1-25 placing them in the top quartile of their peer group.
• The rest of the eight funds earned a score in the 26-50 range, placing them in the second quartile of their peer group of funds.
Note these ranking are in line with Morningstar’s evaluation of the Freedom funds as of June 30 in which they ranked this group of funds as Average. Morningstar ranks 20 Target Date families each quarter.
Target Date Funds are typically funds of funds that are managed towards the target retirement date in the fund’s name. Fidelity, for example has target date funds with dates that range from those currently retired out to the year 2050. Target Date Funds are a staple of 401(k) and other defined benefit retirement plans.
All too often a retirement plan sponsors will default to the suite of Target Date Funds offered by the platform used by the plan provider. In fact, plan sponsors need to perform the same level of due diligence on the Target Funds they offer in the plan as with any other investment choice included in the investment menu.
Target Date Funds have been marketed as a one-decision set it and forget it investment option. In my opinion, there is no such investment option.
Investors considering a Target Date Fund need to do their analysis of the fund(s) they are considering to determine if this is an appropriate investment for them. Further investors should not feel compelled to invest in the fund with the target date closest to their projected retirement date, but rather should pick the fund that best matches their investment objectives.
Please feel free to contact me with questions about Target Date Funds or to address your investment and financial planning advice needs.
Do-it-yourselfers check out morningstar.com to analyze your investments and to get a free trial for their premium services. Check out our Resources page for links to a variety of tools and services that might be beneficial to you.