It's been the right kind of market for T. Rowe Price Retirement funds.
Nearly all of the funds in this series boast category-topping records for the five years through December 2013. The series' strong performance isn't surprising; the glide path features a higher equity stake than most in the industry, and the equity market has surged since reaching a low in March 2009. Robust performance from the underlying equity funds hasn't hurt, either. All but one equity fund (Small-Cap Value) landed in its category's top half during the past five years, with most in the top quartile.
Of course, the five-year period doesn't encompass the traumatic market plunge of 2008, when the equity-heavy glide path was a headwind and the majority of the series' funds fell in the bottom half of their categories. Investors close to retirement may have been rattled by such losses, which served as a blunt reminder that this is no conservative investment. However, those who stuck with it have recouped their losses since. The series has rewarded investors over a long time period, even when considering its more-aggressive equity stance. Risk-adjusted returns during the past decade for the five funds with records that long were above the category norms.
Investors who aren't comfortable with the equity exposure here now have another option. T. Rowe Price launched its Target Retirement funds in August 2013, featuring a glide path with equity exposure closer to the industry norm. For example, the Retirement funds hold 55% in equities at the retirement date, while the new Target Retirement funds own 42.5%. The Target Retirement funds might appeal to investors concerned about steep losses near or in retirement or those with a shorter window for withdrawals.
With either option, investors are getting topnotch, experienced management in the underlying funds and from an asset-allocation perspective. T. Rowe also has a strong investment culture and above-average manager tenure. Investors must know which asset-allocation mix best fits their needs, but T. Rowe Price remains a compelling option.
Process Pillar:Positive | Katie Rushkewicz Reichart, CFA 02/13/2014
T. Rowe Price based the construction of its Retirement funds on in-house studies that suggested investors spend more money in retirement than they anticipate and risk outliving their savings. As a result, the series' asset mix is fairly aggressive. It begins at 90% equity/10% fixed income when investors are the furthest from retirement. That split is roughly in line with 2055+ fund peers, yet the Retirement funds maintain a higher equity stake than many of their rivals, both leading up to and during retirement. The funds adjust their asset allocations at the end of each quarter until they reach the target allocation of 55% equity at retirement. The shifting doesn't stop at retirement, however. Once the retirement allocation of 55% equity/45% fixed income is reached, the quarterly shifts continue for 30 years after retirement until the equity stake comes down to 20%.
The underlying holdings mostly remain the same over the life of the funds with the exception of T. Rowe Price Inflation Focused Bond, which is introduced 15 years before retirement and whose stake increases during retirement in order to produce near-term income for retirees and to protect against inflation.
In August 2013, T. Rowe launched a second target-date series featuring equity exposure that's more in line with the industry norm for investors who have a lower risk tolerance.
The underlying funds in this target-date series benefit from T. Rowe Price's strong investment culture. Long manager tenures are common, as is an emphasis on high-quality securities. The funds used in the target-date series have strong long-term records: Of the 15 underlying funds with 10-year records through December 2013, all but two landed in the top half of their categories. A majority of the underlying funds were Morningstar Medalists as of December 2013, with a few rated Neutral because they had relatively new managers.
In July 2010, T. Rowe increased the series' inflation-protection. The internally managed Short-Term Income, which previously invested in cash and short-term bonds, was renamed Inflation Focused Bond. It has the flexibility to hold as much as 80% in non-TIPS investment-grade bonds and kicks in 15 years before the target retirement date. The series also added T. Rowe Price Real Assets PRAFX, which invests in the stocks of commodity producers and REITs. Although commodity-related stocks often move with the broad market in the short run, T. Rowe's research argues they behave more like the underlying commodities in the long run and should help hedge inflation. The fund's allocation is targeted at 5% of assets throughout the glide path. Meanwhile, the international stake increased to 30% from 20% of total equity exposure in recent years to further increase diversification.
Performance Pillar:Positive | Katie Rushkewicz Reichart, CFA 02/13/2014
This series' above-average equity allocations shape its performance. Its equity stake leading up to retirement is more than 10 percentage points greater than the industry norm and remains above average throughout retirement. As a result, the series may experience short-term volatility, as was the case during 2008's market plunge, when nearly all of the funds landed in the bottom half of their peer groups. But the series' aggressive allocation to stocks paid off in the equity-led market of 2009, 2010, 2012, and 2013, resulting in category-topping five-year records through December 2013 for all but the Income and 2005 funds. Meanwhile, the five funds that have 10-year records also come out ahead of all peers. Despite the series' above-average equity allocation, which has resulted in above-average standard deviations, the funds' risk-adjusted returns over the trailing three-, five-, and 10-year periods were mostly top-decile.
The underlying funds are critical to the series' overall performance. About two thirds of the funds that Morningstar analysts cover earn a Positive rating for their Performance pillar, with the rest Neutral. During the trailing five-year period through December 2013, 81% of the underlying funds ranked in the top half of their respective peer groups. The domestic-equity funds have been particularly strong, though the series' international-equity offerings have gained steam in recent years.
People Pillar:Positive | Katie Rushkewicz Reichart, CFA 02/13/2014
T. Rowe Price's 12-member asset-allocation committee makes the strategic decisions for the funds. The committee has successful long-term track records on the firm's asset-allocation products, including the Spectrum, Personal Strategy, and target-date funds. Committee member Rich Whitney became chairman May 1, 2011, after longtime chairman Ned Notzon retired from the firm. Charles Shriver filled the open spot on the committee. Shriver is a 20-year veteran at the firm who worked with Notzon on the Personal Strategy and Spectrum asset-allocation funds for 12 years before becoming sole manager.
Jerome Clark, a T. Rowe Price veteran and asset-allocation committee member, runs the funds' day-to-day operations. Clark joined the firm in 1992 and launched what is now the firm's college-savings plan before taking the reins here. Wyatt Lee and Kim DeDominicis assist him. There are 14 other members on the asset-allocation research and development team, which oversees broad research efforts. Average manager tenure of the series' underlying funds is roughly eight years, higher than the mutual fund industry's average. T. Rowe Price has a history of handling manager changes for the underlying funds well, with a long transition period being the norm.
According to T. Rowe Price's compliance department, Clark has more than $1 million invested in T. Rowe's target-date collective trusts, which he runs with a similar strategy.
Parent Pillar:Positive | Katie Rushkewicz Reichart, CFA 12/31/2013
T. Rowe Price has long exhibited many attractive attributes. The firm's disciplined, risk-conscious investment process has consistently produced successful results across its fund lineup, often with less volatility than peers. Many managers spend their careers at the firm, providing continuity for fund shareholders. Manager retirements are typically announced well in advance, allowing for a long transition process.
T. Rowe experienced a few unexpected departures in 2013, including Kris Jenner of T. Rowe Price Health Sciences PRHSX and Joe Milano of T. Rowe Price New America Growth PRWAX, who independently left to start their own hedge funds. While their exits are a loss for the firm, such occurrences are rare, and flight risk for other managers (beyond retirements) does not appear heightened. Departures on the analyst side also bear watching, as the domestic-equity team saw a few more than usual in 2013, particularly within the health-care sector. Elsewhere, the firm has bolstered resources, particularly on the fixed-income side, which saw a rise in analysts from 33 in 2007 to 74 in 2013.
More broadly, the firm has acted in fundholders' interests by closing funds with surging asset bases and avoiding trendy fund launches. Reasonable fees and a manager compensation plan focused on long-term performance also help. However, manager ownership of fund shares is not industry-leading.
Price Pillar:Positive | Katie Rushkewicz Reichart, CFA 02/13/2014
T. Rowe Price's Retirement Funds are among the cheapest actively managed target-date funds that retail investors can buy. The series' asset-weighted cost is well below the target-date asset-weighted industry average. There is no overlay fee charged for the additional service of tactical asset-allocation changes.