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JULY 26, 2004
Funds That Adjust As The Years Go By Lifecycle funds do the timely asset reallocations that you mean to do but often don't. You check your 401(k) and IRA balances at least once a month and fine-tune allocations among funds depending on changing market conditions, which you monitor closely. You study shareholder reports and give serious thought to fund managers' commentaries. You have a long-range strategy that gradually shifts the overall mix from riskier equities to more stable fixed-income investments as you approach retirement age. Are you that sort of investor? Probably not. Study after study shows that most people fail to properly monitor, diversify, and rebalance their portfolios. Sure, with a hefty six-figure account you could hire someone to do all that for you -- and pay that person 1% or 2% a year or more. But if you're younger, with a lower balance -- or you'd rather keep that fee yourself -- there is an alternative: a breed of mutual funds called "lifecycle" funds. What distinguishes these from other asset-allocation funds is that they rebalance -- going from heavy commitments in stocks to greater allocation in bonds -- as their shareholders move toward retirement. In other words, these funds do all the things you say you are going to do but don't. "These are cruise-control funds," says Daniel Wiener, editor of the newsletter Adviser for Vanguard Investors. Lifecycle, or target-maturity, funds could be the only investment decision you ever need to make. You choose a fund with a maturity date close to your expected retirement and just keep putting money in there year after year. A 35-year-old might choose Fidelity Freedom 2040 (FFFFX ), which is specifically managed for investors who plan to retire around that time. This all-in-one approach is making lifecycle portfolios one of the best-selling mutual-fund products. Assets soared 68% this year, to more than $32 billion, according to Boston-based Financial Research. There are 223 target-maturity funds offered by such companies as Fidelity Investments, T. Rowe Price (TROW ), and the Vanguard Group. Few of these funds have long records, but the returns they have earned are certainly competitive within the fund universe and against the stock market as a whole. In a 401(k) or similar plan, you're pretty much stuck with the target-maturity funds that your employer selects. In an IRA that you control, you can choose what you like best. And though most of these funds are in tax-advantaged plans, there's nothing to stop you from using them for general investment purposes. Although the overall idea behind lifecycle funds is the same, the asset-allocation strategy and investment styles do vary. So, of course, do fees. Here are some important issues to consider before you invest: ASSET ALLOCATION What's the right mix of stocks, bonds, and cash? "For all the millions of words spent on the topic of asset allocation...you get answers all over the map as to what the ideal asset allocation should be," says John Rekenthaler, president of Morningstar, the Chicago fund tracker. T. Rowe Price, for instance, tilts more toward equities than than some of its peers. Look at the T. Rowe Price Retirement 2005 Fund (TRRFX ), some of whose shareholders might already be retired. About 62% of the assets are in T. Rowe Price equity funds, with 29% in fixed income and 10% in cash portfolios. (This adds up to more than 100% due to rounding.) In contrast, just 35% of the Vanguard Target Retirement 2005 (VTOVX ) fund is invested in stock funds, with the remainder in bond offerings. Jerome Clark, who runs T. Rowe's retirement portfolios, says today's seniors may live 30 years in retirement, so they need to avoid the trap of getting too conservative with their portfolios too soon. "What might seem like a prudent investment approach might actually prove more risky in the long run," Clark says. In fact, T. Rowe's retirement funds with later maturity dates, including 2040, 2035, and 2030, hold as much as 93% of their portfolios in equities. Fidelity Freedom funds with the same maturity dates have slightly smaller allocations to. If you select the target-maturity fund in your retirement plan, be careful not to add other funds to the mix unless you are adding true diversifiers such as real estate or commodities that the lifecycle funds don't already own. Otherwise, you'll skew the asset-allocation plan. HOLDINGS You need to consider how the fund implements its strategy. More often than not, you'll find that the investments within lifecycle funds are other funds offered by the sponsoring fund family. That's certainly the case with the Fidelity Freedom funds, which hold as many as 19 Fidelity portfolios. Chances are you won't even have that many options in your retirement account. Not surprisingly, Fidelity's target-maturity funds are well-diversified among actively managed funds, since that is Fidelity's speciality. Just look at Fidelity Freedom 2040. It holds five international funds, including Fidelity Japan (FJPNX ), Fidelity Southeast Asia (FSEAX ), and Fidelity Europe (FIEUX ). Some of the fund's other holdings include Fidelity Mid-Cap Stock (FMCSX ), Fidelity Blue Chip Growth (FBGRX ), and Fidelity Investment Grade Bond (FBNDX ). Barclays LifePath funds aren't nearly as complex. The typical portfolio mainly sticks to five index funds. Vanguard's Target Retirement funds are even more basic, often using just four index funds: Vanguard Total Bond Market (VBMFX ), Vanguard Total Stock Market (VTSMX ), Vanguard Pacific Stock (VPACX ), and Vanguard European Stock (VESIX ). Different from the fund-of-funds approach are the Wells Fargo Outlook Funds. They invest directly in stocks and bonds rather than mutual funds. Top holdings in the Wells Fargo Outlook 2040 Fund (WFC ) include much of what you would get in an index fund: Microsoft (MSFT ), Pfizer (PFE ), Citigroup (C ), and General Electric (GE ). EXPENSES Costs for target-maturity funds vary widely. AIG SunAmerica, for instance, recently launched a new series called High Watermark Funds. What makes them intriguing is that investors are guaranteed the highest net asset value attained during the life of the fund if they hold shares to maturity. But that feature comes at a high price. The fund's 1.65% expense ratio is above the average 1.31% for the typical moderate-allocation fund. There's also a good chance that you'll have to pay a sales charge of as much as 5.75% to invest in one of these funds. In contrast, expense ratios for the Fidelity Freedom funds, which are the most popular of the bunch, with a combined $25 billion in assets, range from 0.70% to 0.94% of assets. That includes a standard management fee of 0.10% for the asset-allocation service. Vanguard's Target Retirement funds are even cheaper, with an expense ratio of about 0.20%. If you're searching for another low-cost option, TIAA-CREF is expected to roll out seven target-retirement funds later this year. PERFORMANCE Because target-maturity funds are relatively new -- only nine portfolios have a 10-year track record -- there's limited data available to judge their success. Even so, their performance as a group looks pretty good. Five of those funds beat their Morningstar peers, including conservative- and moderate-allocation and large-blend funds, while the other four came within a percentage point. One standout is the Scudder Target 2010 (KRFAX ) fund, which gained an average annual total return of 9.78% for the 10 years ended on June 30, while the typical conservative allocation fund rose an average of 7.54%. For investors with long time horizons -- but not much time on their hands -- the all-in-one convenience of lifecycle funds is right on target.  By Lauren Young
BW MALL
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