Target Date Mutual Funds - Right Idea, Wrong Assets

Friday’s WSJ (Wall Street Journal) FUND TRACK column by Daisy Maxey highlights a new strategy adopted by mutual funds to sell retail investment products to younger investors. They are calling these ‘target date funds’ and Vanguard explains their offerings are generated by ‘interest expressed by parents, grandparents and younger investors themselves.’ Vanguard’s ‘Vanguard Target Retirement 2055 Fund’ was launched last week and its main value claims are to have a long-term focused on the year 2055, be broadly diversified and be a bargain with a lower expense ratio than comparable funds. Bill McNabb, Vanguard COE described it, weakly, as a “little bit of a statement about starting to invest as soon as possible and doing so in a diversified manner.”
I’m underwhelmed by Vanguard’s effort but heartened by what appears to be public recognition that a long term personal commitment to financial responsibility is actually a good idea. Never mind that it is primarily a long term investment in a short term product mix of stocks and bonds providing regular work for fund managers for a very long time (45 years) and that it is designed for investors who want to have little involvement in the investments and will need to settle for minimal returns. It’s good for Vanguard and, other than the high cost of lost opportunity, won’t hurt the investors a lot. In reality, the mutual funds offering these are simply competing with your local bank’s savings accounts: money put away is money not spent…
The question becomes: why adopt a long-term investment strategy that relies on the performance of short term investment products that ultimately become an annuity income for fund managers? I would contend that assets that appreciate and are managed by co-owners with a vested interest in maintaining the value of the asset is a much better choice. The only such investment class to provide those features is real estate and the only subclass to protect the investor from the vagaries of relying on continued employment (of borrowers) to minimize risk is the HECS.
Target retirement funds are a great idea. Find one filled with Home Equity Conversion Sales that have an average appreciation rate for a tenure forecast of 30 years and that reinvests those assets that don’t make it that long and you will find a fund that can be counted on for unrivaled stability and risk-adjusted return that will multiply by 20 your retirement savings. Had such a fund been acquired in 1979, appreciated at the Case/Shiller US average appreciation rates thru last December and had reinvested its cash in-flows from early liquidations, the fund would have converted a 4.38% appreciation rate into an annual return of 9.63%, far better than the US stock market’s anemic 1.1%.