|
Target-date mutual funds,
also called lifecycle funds, are exploding in
popularity. Assets in the category increased from $70
billion at the end of 2005 to $115 billion at the end of
2006, and forecasters expect the trend to continue.
Driven in large part by retirement plans, the growth is
testimony to the ease and effectiveness of the
target-date investment structure.
But with this proliferation has come confusion. Few
target-date funds are alike, and many lack track records
that provide a meaningful basis for comparison. It’s not
surprising that many advisors and retirement plan
analysts wrestle with the challenge of screening the
myriad offerings.
Based on our experience in providing time-based asset
allocation solutions since 1995, here are some
suggestions that we believe can help effectively
evaluate target-date funds.
-
Understand the rationale for the glide path.
The glide path is a map of how a fund’s asset
allocation changes over time. It is also the key to
understanding a fund’s investment philosophy and
process. For example, the glide path for the
Seligman TargetHorizon ETF Portfolios, which
were launched in September 2005, is based on
research that shows the relative risk of asset
classes changes dramatically as holding periods
lengthen. The importance of understanding how a
glide path was developed and how it is managed and
rebalanced goes beyond due diligence. A clear,
intuitively appealing process that you can explain
to clients with conviction can dramatically increase
the odds that they will stick with your advice and
enjoy the long-term benefits of a well-crafted
target date strategy.
-
Assess the underlying investments.
How a glide path is implemented is as important as
how it was developed. Most target-date funds use
mutual funds as the underlying investments, which
makes it fairly straightforward, although time
consuming, to assess how closely a fund will
replicate a glide path that you find appropriate.
Consider factors such as tracking error, style
drift, and risk metrics with longer time frames in
mind.
-
Don’t rely solely on Modern Portfolio Theory.
Statistics such as standard deviation and alpha are
powerful tools, but they are based on short time
frames. Standard deviation, for example, is
typically calculated using monthly variance. As
valid as such observations may be for short time
frames, they do not necessarily hold true for longer
periods. Given that target-date funds are inherently
long-term strategies, MPT metrics used in isolation
can be misleading because they do not consider how
the relative risk of asset classes changes over
time. They also can mask the risk of losing the
positive returns that prudent equity allocations
historically have produced over time frames of 10
years and longer.
To learn more about selecting a target date fund, please
contact Seligman Advisors, Inc. at 888-597-1553.
Important Risk Information
Risks of Asset Classes and ETFs
The stocks of smaller companies may be subject to
above-average market-price fluctuations. There are
specific risks associated with global investing, such as
currency fluctuations, foreign taxation, differences in
financial reporting practices, and rapid changes in
political and economic conditions. Because of the
special risks involved with investing in securities of
emerging market companies, investing in such companies
should be considered speculative and not appropriate for
individuals who require safety of principal or stable
income from their investments. Investments in real
estate securities may be subject to specific risks, such
as risks to general and local economic conditions, and
risks related to individual properties. Bonds are
subject to interest-rate risk, credit risk, prepayment
risk, and market risk. Diversification does not assure a
profit or protect against loss in a deciding market.
Investments by the Funds in the ETFs involve risk,
including the risk of loss of principal. An investor in
a Fund will indirectly bear the operating expenses of
the ETFs in which the Fund invests. Thus, the expenses
borne by the investor will be higher than if he or she
invested directly in the ETFs, and the returns may
therefore be lower. To the extent that a Fund has a
substantial percentage of its assets exposed to an
industry or sector through its investment in the ETFs,
the Fund's performance may be negatively affected if
that industry or sector falls out of favor.
Other Risks
Shares of the Funds are not deposits in or obligations
of, or guaranteed or endorsed by, any bank. Shares are
not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other
government agency. In addition, an investment in the
Funds involves investment risks, including the possible
loss of principal. The rate of return will vary and the
principal value of an investment will fluctuate. Shares,
if redeemed, may be worth more or less than their
original cost.
The views and opinions expressed are provided for
general information only, and do not constitute specific
tax, legal, or investment advice to any one person.
Here can be no guarantee as to the accuracy of market
forecasts. Opinions, estimates, and forecasts may be
changed without notice.
Investors should consider the investment objectives,
risks, charges, and expenses of the Fund carefully
before investing. The prospectus contains this and
additional information regarding the Fund. To obtain a
prospectus, please contact Seligman Advisors, Inc. at
800-221-2783. The prospectus should be read carefully
before investing in the Fund.
The Seligman Group of Funds is distributed by Seligman
Advisors, Inc. This material is distributed by Seligman
Advisors, Inc.
Return to Newsletter |
 |
