Morningstar upgrades Schwab target date funds
Firm cites performance, stability as keys to turnaround in recovery from financial crisis woes
Nov 6, 2013 @ 1:24 pm (Updated 3:20 pm) EST
Morningstar Inc. has upgraded its ratings on The Charles Schwab Corp.'s target date funds to “neutral,” from “negative,” because of improved performance, new leadership and stability.
In a report, Josh Charlson, a senior mutual fund analyst at Morningstar, cited “changes at the top” and better stability as the drivers behind the improvements. He also said the Schwab Target series, with vintages from 2010 to 2055, “outpaces most peers over the five-year period through September 2013.”
The longer-dated funds' conservative equity allocation during the 2008 market turmoil was beneficial, but the shorter-dated funds took a hit when an underlying core bond index fund didn't track its benchmark that year, the analyst wrote.
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The finding marks a sharp about-face from April 2012, when Morningstar analyst David Falkof set the negative rating, upbraiding the firm for having had a revolving-door series of managers.
Indeed, the 2008 financial crisis led to a management shake-up at Schwab. In 2010, Schwab Investment Management Inc. hired as chief executive Marie Chandoha, who had been global head of fixed income at BlackRock Inc. She brought in Omar Aguilar as chief investment officer of equities from Financial Engines Inc., and Brett Wander, who was a senior managing director at State Street Global Advisors, as chief investment officer of fixed income.
In addition, the target date series has had its own personnel shuffle, with several managers leaving in 2011. In February 2012, the firm hired Zifan Tang from Barclays Global Investors to take the helm of Schwab Target.
In his April 2012 report, Mr. Falkof noted that while Ms. Tang was a 12-year veteran at BGI and had worked on asset allocation models, she was new to portfolio management. “The ultimate portfolio decisions are now in the hands of a novice manager,” Mr. Falkof wrote.
In the update, Mr. Charlson noted that while the target date management team is still a work in progress, it's a cohesive group — one that's been concentrating on finding the ideal balance between active and passive investment strategies in the funds, as well as striving for a mix of in-house and external managers.
“Tang and the other members of the management team did not inherit a broken product,” Mr. Charlson wrote. “Performance has been consistent even amidst the turmoil, owing in part to some fortuitously timed glide path shifts.”
Though there's still work to be done, “achieving stability at the firm level has been an essential first step toward reviving confidence in the target date funds, leading Morningstar to raise this series' rating to neutral,” Mr. Charlson noted.
A call to Schwab spokesman Mike Peterson was not immediately returned.
Separately, Morningstar's Ibbotson Associates released its third-quarter update on target date funds. Major gains in the equity market — as well as strong performance in non-U.S. developed equities and small caps — have boosted returns, with the average target date fund gaining 5.3% in the quarter.
Strong performance aside, flows into target dates across the board are dropping sharply. Net flows in the third quarter were $1.5 billion, compared with an average of $10 billion per quarter over the last ten years, according to Morningstar.
A number of factors could be behind the slowdown in flows, namely the decision by a number of large plan sponsors to switch to collective investment trusts, which pool trust accounts and offer the largest companies a cheaper alternative to mutual funds.
Darla Mercado covers life insurance, annuities and retirement products for InvestmentNews, and she's looking for advisers' informed opinions, plus chatter on products and other industry developments.
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