American Funds Target Date Rtmt Target-Date Fund Series Report. Morningstar Opinion

Transcription

1 Page 1 of 5 Morningstar Target-Date Fund Series Report For Financial Professional Use Only. Target-Date Series Rating Above Below Bottom Key Features Annual Expense Ratio.81% Active/Passive Exposure 1% Active Open/Closed Architecture 1% Closed Total Net Assets ($M) 6,965 Executive Summary Performance The American Funds Target Date Retirement series has performed respectably during its first three years. The longer-dated funds held up better than most peers in 28's market turmoil, and 29's rally benefited the equity-heavy, short-dated funds. The funds' 21 performance has been mixed, but Morningstar's attribution analysis shows strong selection and low fees have added value. Portfolio This series draws upon all of the American Funds except the firm's municipal-bond funds. The stock funds are heavily weighted in large-cap and mega-cap stocks, and the international funds are mostly topnotch. Its bond funds are typically heavy on corporate bonds and thus court more credit risk than some rivals. Price The underlying funds in the American Funds target-date lineup are among the cheapest broker-sold offerings, and the firm has waived a.1% management fee for the target-date funds. People This series of funds is managed by Alan Berro, Joyce Gordon, Nicholas Grace, James Lovelace, and John Smet. The management team is very experienced, and it also selects strong underlying funds for this series, including several Morningstar Fund Analyst Picks such as American Funds Capital Income Builder and American Funds Income Fund of America. Parent Above Capital Research & Management, the American Funds' parent, is a strong fiduciary, with long-tenured management, long-term performance incentives, and avoidance of gimmicky funds. The funds' fees are low, and the board overseeing its target-date funds is independent. The underlying funds are behemoths, but the firm's multimanager system has been able to handle the assets. Process This series' advisor doesn't adhere to a prearranged glide path (or make one clear in its literature). Its underlying stock funds may hold bonds and cash, so the series' longer-dated funds may hold below-average equity weightings. Its shorter-dated funds previously held above-average exposure to stocks, but the oversight committee has recently cut stock exposure. Strategic Glide Path Total Equity Exposure 1% American Funds Industry Industry Maximum/ Industry Minimum American Funds Industry Available Funds 21 Fund 215 Fund Yr Total Return - & & & & & * ( * ( Yr Performance Quartile 22 Fund 225 Fund 23 Fund Morningstar Opinion American Funds Target Date Retirement has shifted its strategy for investors approaching retirement, but it's still among the industry's best series. Unlike most target-date series that operate from a preestablished strategic glide path, the committee governing this series has leeway to alter its asset allocation in order to capture what it deems to be values in the markets. Thus, the glide path represented in the graphic above, based on broad style-based allocations in the funds' prospectus, may not reflect the committee's current thinking and allocation. The series historically has had heavy stock exposure for investors nearing and past retirement, to lessen the risk of outliving one's assets and not keeping up with inflation. Accordingly, the short-dated funds were stuffed with stocks, including 67% stock exposure for the 21 fund through the end of 29. But the committee acknowledged that the fund's losses in 28 were excessive, in part because its dividendfocused offerings were less resilient in the sell-off. Thus, it since has lowered the stock exposure of the near-dated funds. The 21 fund's stock weight is now around 45% of assets. The series has gone from being more aggressive than the norm for the shortdated funds to having roughly average stock exposure. The committee accomplished the recent transition in the shorter-dated funds deftly by holding the extra 235 Fund 2 Fund 245 Fund John Coumarianos Fund Analyst Fund stock exposure through all the selling in 28. That's consistent with American's successful approach to investing, which is to buy what others are selling and to be patient. However, the recent moves on the shortdated funds reflect a more permanent change in strategy than providing liquidity to the markets. Investors can derive confidence in the series from the fact that American's stock funds are among the best. For the past decade ended Dec. 31, 29, none of American's stock and balanced funds posted annualized or cumulative losses for the decade, despite the S&P 5 Index's cumulative 9% loss. American's bond funds are, on the whole, less attractive than its equity funds, but they are serviceable. Finally, American's fees are reasonable, with the target-date funds consisting of American's least expensive share class--the R6 class as opposed to the R5 class of funds, which previously comprised the targetdate series. The series' A shares are cheap relative to other broker-sold, actively managed options. Overall, American provides a pleasing mix of excellent investment management and low fees, making its target-date funds among the finest in the industry.

2 Page 2 of 5 Morningstar Target-Date Fund Series Report For Financial Professional Use Only. Performance The American Funds target-date funds boast some of the best underlying stock funds in the business, but the longer dated funds have generally outperformed their peer groups while the shorter dated funds haven't. This series used to get more equity-heavy relative to the peer-group norm as investors near and pass retirement. American Funds Target Date 21, which had roughly 67% of its assets in equities versus a 5% norm, gained more than 23% in 29. However, the short dated funds struggled mightily in 28, and the funds' oversight committee has now reduced the amount of stock exposure in the shorter dated funds. So, the 21 fund, for example, now has 45% equity exposure. This is likely a permanent risk reduction. Although the committee thinks maintaining significant stock exposure for early retirees is important, it also recognizes that early retirees can handle only so much volatility. Over the life of Target Date 21, however, from Feb. 2, 27, through June 3, 21, the fund has underperformed its peer group because of its rocky 28 performance. The longer-dated funds have done better relative to their peers. Target Date 245, for example, has dropped 14% over its existence through June 3, 21, while the Target Date category average is a 21% loss. Thanks in part to American's stock selection, Target Date 245 also eked out a victory over its category's 31% return during 29's rally with a 31.6% return. Cash in the longer-dated funds also has helped in downdrafts, and it hasn't hurt in recent rallies. The series' bond funds, such as American Funds Bond Fund of America, suffered mightily in 28, when only U.S. Treasuries rallied. Those funds typically have avoided Treasuries (though they may lean on them more in the future) and sought to add value with corporate bonds that its credit analysts believe are mispriced. This strategy fared much better in 29, as investors' appetite for risk has increased. Target-Date Fund Performance as of YTD Yr 3-Yr % Rank 3-Yr 5-Yr 5-Yr % Rank Star Return % Return % Return % Return % in Cat Std Dev Return % in Cat Rating American Funds Trgt Date Ret 21 A QQ American Funds Trgt Date Ret 215 A QQ American Funds Trgt Date Ret 22 A QQ American Funds Trgt Date Ret 225 A QQ American Funds Trgt Date Ret 23 A QQQ American Funds Trgt Date Ret 235 A QQQ American Funds Trgt Date Ret 2 A QQQ American Funds Trgt Date Ret 245 A QQQ American Funds Trgt Date Ret 25 A QQQQ American Funds Trgt Date Ret 255 A For peer comparisons, 1 = highest return or lowest risk, 1 = lowest return or highest risk. Target Date Funds Risk-Adjusted Returns +/- Category Data as of Attribution Analysis Trailing 3-Year Returns as of % 5.2 Glide Path 2.38 Cost.7 Selection.81 Total Risk-adjusted return exceeding category average Risk-adjusted return trailing category average Category Data is based on longest available performance history: three or five years. For series with more than 18 months of history, but less than three years of history, the risk-adjusted return of the appropriate Morningstar Lifetime Moderate Index is used to create a 3-year history American Funds Glide Path Cost.8 Selection.81 Total -.32

3 Page 3 of 5 Morningstar Target-Date Fund Series Report For Financial Professional Use Only. Portfolio Series Holding-based Style Map - Equity Data as of Nine of the underlying funds in American's targetdate series are Morningstar Fund Analyst Picks, including American Funds Balanced, American Funds Income Fund of America, Capital Income Builder, American Funds AMCAP, American Funds Fundamental Investors, American Funds Washington Mutual Investors, American Funds New Perspective, American Funds EuroPacific Growth, and American Funds New Economy. No other target-date lineup boasts nearly as many Analyst Picks. All of American's stock funds posted positive returns for the trailing decade through the end of 29, owing to the firm's superior analyst staff and long-term perspective. The underlying stock funds benefit from the firm's deep stock-selection prowess, and its expertise in corporate bonds is also formidable. All of the firm's funds are managed by multiple portfolio managers, which helps it deal with the huge asset bases of the underlying funds. On the downside, the firm's stock funds are so big that it's difficult for them to gain significant exposure to mid-caps and small caps. Lately, the firm has revamped its core bond offering Bond Fund of America. Although the firm brings formidable expertise to credit analysis, its managers and analysts arguably held on to lower-grade bonds too long in 28 when spreads (the difference in yield between high-grade and low-grade bonds) narrowed considerably. Bond Fund of America now has a tamer look, owing to a permanent stake in U.S. Treasuries. The firm also lacks specialty funds in bonds, such as a dedicated Treasury Inflation-Protected Securities fund, and it doesn't have a real estate fund. Still, that fact reflects its refusal to issue funds that it believes don't stand on their own investment merits or whose holdings don't constitute discrete asset classes. Deep- Value Core- Value Core Core- Growth High- Growth Giant Large Mid Small Micro Zone represents 75% of series' largest domestic stock holdings Fund centroid represents weighted average of series' domestic stock holdings Investments as of Yr 5-Yr % of 3-Yr % Rank 3-Yr 5-Yr % Rank Morningstar Star Category Assets Return % in Cat Std Dev Return % in Cat Risk Rating American Funds US Government Sec R6 Intermediate Government WWW American Funds Washington Mutual R6 Large Value WWWW American Funds Invmt Co of Amer R6 Large Blend WWWW American Funds American Balanced R6 Moderate Allocation WWWW American Funds American Mutual R6 Large Value WWWWW American Funds Fundamental Invs R6 Large Blend WWWW American Funds Capital Inc Bldr R6 World Allocation WWWW American Funds Inc Fund of Amer R6 Moderate Allocation WWWW American Funds New Perspective R6 World Stock WWWW American Funds Capital World G/I R6 World Stock WWWWW Total # Holdings 21 % Portfolio in 1 Holdings Overall Morningstar Rating 3.93 Price Although Capital Research & Management recently has raised fees on all of the American Funds, they remain among the cheapest broker-sold funds in the industry. The sheer amount of assets the firm runs helps keep prices down, as larger funds can offer economies of scale to shareholders. The firm has created separate retirement (R6) share classes of its underlying funds to create the A share class of its targetdate lineup, and those A shares remain among the least expensive in the industry. Share classes that have American handle administrative duties for 1(k) plans, including R2 and R3, are considerably more expensive. Cost vs. Industry American Funds A.81% Industry.88% Avg Cost Per Share Class Exp Ratio (%) Net Assets ($M) A.81% 2,62 R3 1.16% 1,589 R2 1.54% 1,569 R4.85% 756 R5.55% 291

4 Page 4 of 5 Morningstar Target-Date Fund Series Report For Financial Professional Use Only. People Management: Veteran portfolio managers Alan Berro, Joyce Gordon, Nicholas Grace, James Lovelace, and John Smet run sleeves of the American Funds target-date funds. They have 23 years of tenure at the firm on average. Few, if any, target-date lineups boast such formidable and experienced management. Smet is a fixed-income specialist, while Grace is listed as a manager on American Funds EuroPacific Growth. Berro, Gordon, and Lovelace are listed on a variety of the firm's domestic, foreign, and allocation funds. American is noted for its rigorous hiring process and views its relationships with employees as marriages. It hires the best people it can find and stays with them for the longer haul. Manager Incentives: American Funds portfolio managers are paid on four- and eight-year performance, a Parent Above Corporate Culture: Capital Research & Management, the parent of American Funds, is among the asset-management industry's finest stewards of capital. The firm seeks to hire investment professionals for life. It succeeds so well at that goal that no other firm boasts as many investment professionals with multidecade careers at the same place. Capital's analysts and fund managers have unmatched experience. The firm doesn't issue gimmicky funds based on hot, but ephemeral, asset classes or industries. Conversely, it dedicates resources to efforts that are not remunerative for decades if they have investment merit, such as the firm did with international investing starting in the 195s. Its four- and eight-year compensation structure for analysts and managers allows them to maintain the courage of their convictions and stick with underpriced stocks until the market recognizes their value. Board Oversight: American Funds' target-date series is governed by an independent board of directors, six of whom were new to the board on Jan. 1, 21. Twelve of the board's 14 trustees are independent, as is the chairman. However, only six of the 12 independent directors invest more in the funds they oversee than they receive in annual compensation. The best practice in the mutual fund world. This keeps them focused on their long-term results. Stock portfolios tend to average 2%-25% turnover, which means managers tend to hold stocks for four to five years on average. The compensation incentives allow the managers to have the courage of their convictions and stick with stocks that they think are undervalued until the market recognizes what they've already noticed. The managers also accumulate ownership of the advisor throughout their careers. Regarding investments in the funds, Berro and Gordon have between $1, and $5, in American's targetdate series, while Lovelace, Grace, and Smet have less than $5, in the funds (though the managers are heavily invested in the underlying funds). board is charged with negotiating the funds' expense ratios, and they've garnered a reasonable fee here. Transparency: The American Funds' website offers good information on its target-date lineup, especially on the fund-level pages. Investors can gain access to each fund's breakdown by fund category and underlying fund. There is scant detail, however, on the series' investment rationale and on how to use a targetdate fund. Although many American Funds shareholders work with advisors, who can tailor an individualized asset-allocation plan, the firm could provide more information on the rationale for the funds and on the theory behind the glide path. Senior portfolio managers and executives discuss their views of the markets in video interviews on the firm's website. Regulatory History: These funds' advisor previously paid for inclusion on some brokers' lists of preferred funds, though the practice was legal at the time. Also, the SEC has not reviewed an appeal that the firm made regarding a decision by the Financial Industry Regulatory Authority to fine the firm $5 million for directing brokerage commissions to firms that were top sellers of its funds. Series Management Manager Start Date James B. Lovelace 2-27 John H. Smet 2-27 Alan Berro 2-27 Joyce E. Gordon 2-27 Nicholas Grace 2-27 Tenure Longest Tenure Target-Date Industry Tenure 3.5 years 3.5 years 4.6 years Underlying Funds' Management Tenure 12.1 years Longest Tenure 39.4 years Mutual Fund Industry Tenure 5.1 years Fund Family Data Star Rating QQQQ % of Assets w/star Rating 57.7% Assets (listed in USD $Mil) Mutual Fund Assets 13,212 ETF Assets Other Assets 19,943 Total Assets ($M) 123,156 Number of Funds 65 Stewardship Grade A Manager Tenure 12.6 years Longest Manager Tenure 39.4 years 5-year Manager Retention Rate (%) 98.7%

5 Page 5 of 5 Morningstar Target-Date Fund Series Report For Financial Professional Use Only. Process Glide Path: This series' advisor doesn't adhere to a prearranged glide path (unlike many of its peers) so Morningstar's Glide Path graph may not match its strategic asset allocation. The American Funds targetdate fund with the largest equity allocation, American Funds Target Date Retirement 25, had 85% of its assets in stocks as of March 31, 21, which is a bit below the Morningstar category norm. American's stock funds tend to run with some cash and bonds, so at times, its long-dated funds' equity exposure has been lower. The series' stock exposure begins to taper off about 15 years before retirement, with American Funds Target Date Retirement 21 having roughly 45% equity exposure after the firm recently reduced its stock allocation. The portfolio-oversight committee of American's target-date funds reduced the series' equity allocation in 29's fourth quarter so the series' glide path is far more conservative in the years leading up to and just past retirement. The committee made this move after its dividend-focused offerings, which typically hold up well in market downturns, failed to protect capital as the committee expected in 28's downturn. The move away from equities is intended to reduce performance volatility in the years surrounding retirement. The funds favor large- and mega-cap stocks over small- and mid-caps, a likely side effect of the underlying funds' massive asset bases. Despite the firm's credit expertise, this series doesn't take inordinate risks on the bond side. The American Funds Target Date Retirement 235 Fund has 79% of its fixed-income assets in securities rated AAA, for example, and American Bond Fund of America recently added a strategic U.S. Treasuries stake. The funds don't shy away from international-stock exposure. Rationale: American's portfolio-oversight committee reserves the right to shift the funds' asset allocation rather than sticking to a prearranged glide path. In less able hands, that approach would cause greater concern. Yet the firm's multiple portfolio counselor system, where managers oversee sleeves of the underlying funds, is time-tested and has proved highly successful. The target-date portfolio managers also manage sleeves of the underlying funds, reinforcing our confidence that the team has its finger on the pulse of the target-date funds' asset-allocation policy. Strategic Glide Path Total Equity Exposure 1% American Funds Industry Industry Maximum/ Industry Minimum American Funds Industry Equity Allocation Yr Total Return - & & & & & * ( * ( Yr Performance Quartile 1% U.S. Large Cap U.S. Mid/Small Cap Non-U.S. Developed Non-U.S. Emerging Other Equity % U.S. Large Cap U.S. Mid/Small Cap Non-U.S. Developed Non-U.S. Emerging Other Fixed-Income Allocation 1% TIPS U.S. Government U.S. Investment Grade U.S. High Yield Foreign Cash Other Fixed Income % TIPS U.S. Government U.S. Investment Grade U.S. High Yield Foreign Cash Other