A Look at Lifecycle Funds from Vanguard, Fidelity, and T. R. Pri

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 gettingpopular among investors who seek optimum asset allocation for their retirement investments. The idea of a lifecycle fund is that the fund’sasset 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 thefund’s asset allocation because it’s what makes a lifecycle fund alifecycle 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.

Asset allocations

To see how lifecycle funds are different from each other in asset allocations, I took a look at a total of 27 lifecycle funds fromVanguard, Fidelity, and T. Rowe Price, with target dates ranging from2010 to 2050. The stocks and bonds allocations of these funds are shownin 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). Forexample, 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. Pricehas 63.3% and 31.2%, respectively. In this case, TRP 2010 fund has nearly 10% more in equities than its Vanguard counterpart and a 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.

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