Benchmarking Target-Date Funds: Art or Science? · Director of Investments Morningstar Investment...

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Benchmarking Target-Date Funds: Art or Science?

Jeremy StempienDirector of InvestmentsMorningstar Investment ManagementChicago, Illinois

6B-1

1

► Brief Overview of the Target Date Market Place

► Selecting a Target Date Benchmark

► Qualitative Factors► Quantitative Measures

► Using a Target Date Benchmark

Agenda

6B-2

2

Overview of the Target Date Market Place

6B-3

3

Growing Target Date Fund Flows (retail)

Source: Morningstar Direct, For illustrative purposes only.

-$5,000

$0

$5,000

$10,000

$15,000

$20,000(millions)

6B-4

4

Growing Target Date AUM (retail)


$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

(millions)

6B-5

5

Target Date Fund Series Growth (retail)


0

5

10

15

20

25

30

35

40

45

50

55

Targ

et D

ate

Fund

Ser

ies

6B-6

6

Growing in Importance

$0

$50,000,000,000

$100,000,000,000

$150,000,000,000

$200,000,000,000

$250,000,000,000

$300,000,000,000

$350,000,000,000

$400,000,000,000

$450,000,000,000

$500,000,000,000

Fidelity Investments T. Rowe Price Vanguard BlackRock Wells Fargo Advantage Other

Ass

ets

Und

er M

anag

emen

t


6B-7

7

Market Share of Open-End Target Date AUM

0%

20%

40%

60%

80%

100%

Fidelity

VanguardT. Rowe PriceWells FargoBlackRock

Other

0%

20%

40%

60%

80%

100%

Fidelity

VanguardT. Rowe PriceWells FargoBlackRock

Other


6B-8

8

►$545 billion todayRegistered Funds (Morningstar Investment Management Estimate)*

►$1 trillion during 2014At historical growth rate (Morningstar Investment Management Estimate)*

►$1.7 trillion by 2015 and 60% of DC assetA 2010 McKinsey & Company Study

►$3.7 trillion by 2020 and 48% of DC assetA 2011 Casey Quirk estimate

* Estimate as 6/30/2013

The Growing Importance of Target Date Funds

6B-9

9

Draw of Target Date Funds for Plan Sponsors

► Fiduciary obligations ► Government endorsed QDIA

► Institutionally managed► Access to sophisticated asset classes

► Low participant interaction required

6B-10

10

Goal of Target Date Funds

► Variety of views by plan sponsors► “Provide a pre-determined income replacement ratio”► “Provide an appropriate level of equity & appropriate

asset allocation” ► “Get more conservative over time”► “Have employees feel confident about their retirement

picture”

6B-11

11

Plan Sponsors Are Becoming Paternalistic

► Just 4% of employers are very confident their employees will retire with adequate retirement assets1

► 62% of employees consider themselves “accidental investors”2

► Reluctant to invest/save► Lack confidence

► More plans offering “do-it-for-me” plan features

► Obligated to ensure reasonable plan costs

► Shrinking core investment plan options

1: AllianceBernstein Research, 20122: AonHewitt

6B-12

12

Selecting a Target Date Benchmark

6B-13

13

Glide Path of Hypothetical Fund FamilyRelative to Index Series

Aggressive Index Series

Hypothetical Target-Date Series

Conservative Index Series

0

20

40

60

80

20 28 36 44Age

60

Equi

ty E

xpos

ure (

%)

52 68 76 84

100

6B-14

14

a Morningstar company


Thomas Idzorek, CFA, Global Chief Investment OfficerMorningstar Investment Management

Jeremy Stempien, Senior ConsultantIbbotson Associates

Nathan Voris, ConsultantIbbotson Associates

September 30, 2011

Available: www.ibbotson.com/research


6B-15

15

‘40 Act Target Date Benchmarking Practices

Primary Prospectus BenchmarkNumber of

Fund SeriesNumberof Funds

S&P 500 19 145Blended Benchmark 5 43Barclays Capital US Aggregate Bond 8 32Russell 3000 4 29S&P Target Date 4 27Morningstar Lifetime Moderate 2 16Dow Jones Target Year 2 15Dow Jones Real Return Portfolio Target 2 15MSCI US Broad Market 1 10Dow Jones US Total Full Cap 1 7Russell 1000 1 7Morningstar Lifetime Aggressive 1 5Morningstar Lifetime Conservative 1 5Wilshire 5000 1 5Bank of America/Merrill Lynch US Treasuries 1-3 Year 1 4Barclays US Intermediate-term Bond 1 2Dow Jones Moderately Conservative 1 1Russell 1000 Value 1 1No listed primary benchmark in Morningstar Direct 22 76

Total 445

Source: Morningstar Direct as of 12/31/2012

6B-16

16

Common Benchmarking Practices

× Single Index-Relative to Benchmark× Inappropriate for Target Maturity Funds

× Custom Benchmark × Ignores Asset Allocation Decision

× Blended Index× Ignores Asset Allocation Decision

× Peer Group (Universe) Benchmark× Not investable

6B-17

17

►Constituents / Opportunity Set:No universally accepted standard

►Weighting Scheme: No universally accepted standard

Target Maturity BenchmarksNo Universally Accepted Benchmark Characteristics

6B-18

18

Retu

rn %

Standard Deviation

-1012345678

0 5 10 15 20

4 - US Equity Indexes3- US Bond Indexes5-2050 Indexes6-2030 Indexes5-2010 Index

Historical Annual Risk and Return Graph: 2/2001 – 1/2011

For illustrative purposes only. Not to be used to assess the exact risk/return relationship between indexes. Indexes shown are unmanaged and not available for direct investment. Past performance is not a guarantee of future results.

6B-19

19

× Qualitative Factors – adding to the CFA Institute’s “Characteristics of a good benchmark”)

× Quantitative Measures of “Goodness of Fit”× Average Absolute Stock-Bond Glide Path Differential× Average Historical Tracking Error× Average Forward-Looking Tracking Error


6B-20

20

► Unambiguous► Investable► Measurable► Appropriate► Reflective of current investment opinions► Specified in advance►Robust overall glide path methodology

►Robust opportunity set of individual asset classes

►Robust methodology for determining the detailedintra-stock and intra-bond asset class allocations

CFA Institute’sCharacteristics of a Good Benchmark

Morningstar’sCharacteristics of a Good TargetMaturity Benchmark

Qualitative Factors: Adding to the CFA Institute’s“Characteristics of a good benchmark”

6B-21

21

IndexData Start Date

No. of Asset Classes

Year Increments

“To” or“Through”

Reconstitute /Rebalance

S&P Target Date Series May 2007 9 5 -- Annual/Monthly

Dow Jones Global Jan 1983 14 5 Through Semi-annual

Dow Jones US Target Jan 1983 10 5 Through Semi-annual

Dow Jones Real Return Target Date Series

Dec 1999 5 5 -- Semi-annual

Morningstar Lifetime Allocation (w/risk tracks)

Dec 2001 19 5 Through Annual/Quarterly

Source: Internal Morningstar Investment Management analysis based on information collected

Target Date Index Comparisons: Overview

6B-22

22

Index Asset Classes

Number of Asset

ClassesS&P Target Date Series ► Stocks: US Large, US Mid, US Small, Int’l Equities, Emerging Mkts, US REITs

► Bonds: Core Fixed Income, Short Term Treasuries, TIPS9

Dow Jones Global ► Stocks: US Large Cap Growth, US Large Cap Value, US Mid Cap Growth, US Mid Cap Value, US Small Cap Growth, US Small Cap Value, Europe/Canada, Asia/Pacific, Emerging Markets

► Bonds: US Government Bond, US Corporate Bond, US Mortgage Bond, Majors (ex US), 1-3 month T-bill

14

Dow Jones US Target ► Stocks: US Large Cap Growth, US Large Cap Value, US Mid Cap Growth, US Mid Cap Value, US Small Cap Growth, US Small Cap Value

► Bonds: US Government Bond, US Corporate Bond, US Mortgage, 1-3 month T-bill

10

Dow Jones Real Return Target Date Series

►Stocks: Global Equities, Global REITs

►Bonds: US Agg. Bonds, US TIPS

►Other: Commodities

5

Morningstar Lifetime Allocation (w/risk tracks)

►Stocks: US Large Cap Growth/Value/Core, US Mid Cap Growth/Value/Core, US Small Cap Growth/Value/Core, Non-US Dev., Emerging Markets

►Bonds: Long-Term Core Bonds, Intermediate-Term Bonds, Short-Term Bonds, Global Government, Emerging Market Bonds, TIPS, Cash

►Other: Commodities

19

Source: Internal Morningstar Investment Management analysis based on information collected

Target Date Index Comparisons: Asset Classes

6B-23

23

Case Study: Fidelity Freedom Funds

6B-24

24 Source: Fidelity Freedom Funds Prospectus and Fidelity Web Site as of January 2012

× Glide Path Philosophy – “Please note that with the exception of the Freedom Income Fund, each fund's asset allocation strategy becomes increasingly conservative as it approaches the target date and beyond.”

× Intra-Stock / Intra-Bond Methodology – “At Fidelity, we spent three years perfecting our dynamic asset allocation rolldown technique before ever using it in the marketplace, and we believe our technique is the most effective in the industry. Our closely protected, non-linear technique strives to maximize returns during a shareholder's accumulation years and minimize downside risk after retirement.”

× Asset Classes – Large-cap Equity, Small-cap Equity (Growth tilt), Non-US Developed, Non-US Developed Small Cap, Emerging Markets, REITs, Commodities, TIPS, High Yield Bonds, Emerging Markets Bond, Intermediate-term Bond, Floating Rate Notes

Fidelity Freedom Funds: Key Philosophies

6B-25

25

× Average Absolute Stock-Bond Glide Path Differential× Average Historical Tracking Error× Average Forward-Looking Tracking Error

Quantitative Measures: Finding the “Best Fit” Benchmark Family

6B-26

26

Goodness of Fit: Average Glide Path DifferentialGlide Path of Hypothetical Fund Family Relative to Index Family

Target Date Benchmark

Hypothetical Fund Family

0

20

40

60

80

25 35 45

Age55

Equit

y Exp

osur

e (%

)

50 65 70 75

100

For illustration only.

30 40 60 80

6B-27

27Source: Glide paths are estimated by Morningstar Investment Management using information collected in March 2011 from Dow Jones website, S&P website, and Morningstar databases. Thomas Idzorek, Jeremy Stempien, and Nathan Voris, “Selecting a Target Date Benchmark, April, 2011. For illustration only.

Goodness of Fit – Average Glide Path DifferentialFidelity Freedom Fund Family Relative to Index Families

6B-28

28

Average Absolute Stock-Bond Glide Path DifferentialFidelity Freedom Funds

Fidelity Freedom Fund

Morningstar Lifetime Allocation Index -

Aggressive

Morningstar Lifetime

Allocation Index -

Moderate


Allocation Index -

ConservativeS&P Target

Date Indexes DJ Target Date

DJ Real Return Target Date Indexes

DJ US Target Date

2050 2.91 1.07 9.34 1.67* 0.15 0.05 1.81

2045 6.72 2.52 6.42 5.64 3.82 4.02 2.98

2040 8.38 3.66 7.25 5.73 3.16 3.43 0.60

2035 8.82 2.67 12.36 3.28 2.81 2.34 8.04

2030 15.98 6.16 13.81 6.84 4.79 4.01 10.83

2025 16.72 2.07 20.48 4.95 13.07 11.92 17.80

2020 18.48 0.24 21.33 5.82 17.95 16.53 17.93

2015 18.61 0.35 19.09 5.64 20.09 20.01 14.70

2010 10.59 6.72 23.41 4.18 28.17 28.10 16.47

2005 10.50 4.80 20.24 2.48* 26.47 26.42 8.86

2000 25.15 11.54 2.76 14.15* 6.85* 6.85* 11.77*

Income 23.83 11.39 2.01 13.77 5.58 5.53 13.95

Average 13.89 4.43 13.21 6.18 11.08 10.77 10.48

* Target date indexes did not exist for these target dates; thus, the stock-bond split was inferred from corresponding near-dated indexes from the same index family.Source: Glide paths are estimated by Morningstar Investment Management using information collected in March 2011 from Dow Jones website, S&P website, and Morningstar databases

6B-29

29

Goodness of Fit: Average Historical Tracking ErrorGlide Path of Hypothetical Fund Family Relative to Index Family

Target Date Benchmark

Hypothetical Fund Family

0

20

40

60

80

25 35 45

Age55

Equit

y Exp

osur

e (%

)

50 65 70 75

100


30 40 60 80

Example:Identify 20XX Hypothetical Fund Family Time-Series

Identify 20XX Target Date Benchmark Time-Series

Calculate Historical Tracking Error

6B-30

30



Aggressive


Allocation Index -

Moderate


Allocation Index -


Date IndexesDJ Target

Date


DJ US Target Date

2050* 1.88 2.00 3.08 N/A 2.04 2.94** 3.89

2045* 2.11 1.97 2.78 2.11 2.06 3.88 3.72

2040 2.14 1.93 2.82 2.22 2.05 4.07 3.60

2035 2.24 1.82 3.10 2.25 1.97 4.57 3.48

2030 2.49 1.81 4.02 2.53 2.18 5.62 3.47

2025 3.11 1.85 4.62 2.41 2.71 6.13 3.59

2020 2.91 2.17 5.61 2.76 4.01 6.85 4.57

2015 3.41 2.15 4.97 2.33 4.22 6.01 4.59

2010 2.50 2.56 5.37 3.37 5.63 6.06 5.89

2005 2.09 2.91 5.50 N/A 6.44 N/A 6.65

2000 4.76 2.97 2.97 N/A N/A N/A N/A

Income 4.50 2.88 2.74 2.74 3.09 4.30 3.06

Average 2.85 2.25 3.96 2.53 3.31 5.04 4.23

* Target date indexes did not exist for these target dates; thus, the stock-bond split was inferred from corresponding near-dated indexes from the same index family.Source: Glide paths are estimated by Morningstar Investment Management using information collected in March 2011 from Dow Jones website, S&P website, and Morningstar databases

Goodness of Fit: Average Historical Tracking ErrorFidelity Freedom Funds: Annualized Tracking Error

6B-31

31

Goodness of Fit: Average Forward-Looking Tracking ErrorGlide Path of Hypothetical Fund Family Relative to Index Family

Fund Allocation – Benchmark Allocation = Active Asset Allocation (hA)Forward-Looking Tracking = (hA∑hA

T)^2 where ∑ covariance matrix

Asse

t Clas

s Allo

catio

n % Fund’s Asset

Allocations

Benchmark’s Asset Allocations


6B-32

32

Goodness of Fit – Forward-Looking Tracking ErrorFidelity Freedom Funds: Annualized Tracking Error



Aggressive


Allocation Index -

Moderate


Allocation Index -


Date IndexesDJ Target

Date


DJ US Target Date

2050 4.14 3.40 2.18 N/A 4.27 4.56 6.26

2045 4.31 3.50 2.07 2.98 4.54 4.37 4.54

2040 4.48 4.48 1.86 3.24 4.70 4.44 6.50

2035 4.53 3.34 1.55 3.08 4.06 5.01 5.86

2030 5.39 3.45 1.78 3.28 3.45 5.30 5.14

2025 5.38 2.57 2.96 3.02 2.42 5.96 4.23

2020 5.27 1.97 3.58 2.84 2.23 6.11 3.65

2015 5.08 1.79 3.35 2.67 2.65 5.57 3.59

2010 3.66 1.56 4.03 1.73 4.17 5.85 4.52

2005 3.43 1.79 3.88 N/A 5.05 5.66 5.02

2000 5.46 3.06 2.21 N/A N/A N/A N/A

Income 4.97 2.88 2.26 3.21 3.42 3.31 3.32

Average 4.67 2.82 2.64 2.89 3.72 5.10 4.78

Source: The detailed asset allocation exposures are estimated by Morningstar Investment Management using information collected in March 2011 from Dow Jones website, S&P website, and Morningstar databases.

6B-33

33

Benchmark FamilyAverage Glide Path

DifferentialAverage Annual

Tracking Error

Average Forward-Looking Tracking

ErrorMorningstar Lifetime Allocation Aggressive 13.89 2.85 4.67Morningstar Lifetime Allocation Moderate 4.43 2.25 2.82Morningstar Lifetime Allocation Conservative 13.21 3.96 2.64S&P Target Date Series 6.18 2.53 2.89Dow Jones Global 11.08 3.31 3.72Dow Jones Real Return Target Date Series 10.77 5.04 5.10Dow Jones US Target 10.48 4.23 4.78

Selecting a Target Date Benchmark:Fidelity Freedom Fund Family – Best Fit Benchmarks

Source: Summary of information from previous slides.

6B-34

34

Using a Target Date Benchmark

6B-35

35

a Morningstar company


Thomas Idzorek, CFA, Global Chief Investment OfficerMorningstar Investment Management

Jeremy Stempien, Senior ConsultantIbbotson Associates

April 5, 2012


Available: www.ibbotson.com/research

6B-36

36

“…the use of target date benchmarks for benchmarking target date funds is significantly more nuanced than traditional benchmarking, requiring greater skill and interpretation, and perhaps most unsatisfyingly, regardless of the skill of the benchmarker, it will not definitively answer the question that investors, plan sponsors, and advisors care about the most: is the glide path of the fund family, including the evolving effective asset allocations, good?”

Quantitative Measures: Finding the “Best Fit” Benchmark Family

6B-37

37

Strait Performance Comparison - Fidelity Freedom Funds(Dec. 2006 – Sept. 2011)

N PeriodsArithmetic Mean (%)

Geometric Mean (%)

Standard Deviation

(%)Sharpe

RatioNumber of

Drawdowns Skewness KurtosisFidelity Freedom 2050 60 0.47 -1.45 19.75 -0.05 3 -0.76 1.06Morningstar Lifetime Mod 2050 60 2.91 1.02 19.82 0.07 4 -0.80 1.42

Difference -2.44 -2.47 -0.07 -0.12 -1 0.04 -0.35

Fidelity Freedom 2045 60 0.82 -0.96 19.03 -0.04 3 -0.77 1.06Morningstar Lifetime Mod 2045 60 2.86 1.00 19.66 0.07 4 -0.80 1.41

Difference -2.03 -1.95 -0.62 -0.10 -1 0.03 -0.35


Difference -1.98 -1.89 -0.65 -0.10 -1 0.02 -0.25


Difference -1.89 -1.78 -0.77 -0.10 -1 0.02 -0.27


Difference -1.75 -1.67 -0.59 -0.10 -1 0.01 -0.18

Source: Morningstar EnCorr and author calculations. For illustrative purposes only.

6B-38

38

Glide Path Comparison Graph

Source: Morningstar Direct. For illustrative purposes only.

0%

20%

40%

60%

80%

100%

2055 2050 2045 2040 2035 2030 2025 2020 2015 2010 2005 2000 Income

Target Date

Equi

ty

Morningstar Lifetime Moderate Index

Fidelity Freedom Funds

6B-39

39

Beta-Adjusted Performance Comparison - Fidelity Freedom Funds(Dec. 2006 – Sept. 2011)

N PeriodsArithmetic Mean (%)

Geometric Mean (%)

Standard Deviation

(%)Sharpe

RatioNumber of

Drawdowns Skewness KurtosisFidelity Freedom 2050 60 0.47 -1.45 19.75 -0.05 3 -0.76 1.06M* Mod 2050 (Beta-Adjusted) 60 2.34 0.37 20.12 0.04 3 -0.83 1.44

Difference -1.87 -1.82 -0.38 -0.09 0 0.07 -0.38

Fidelity Freedom 2045 60 0.82 -0.96 19.03 -0.04 3 -0.77 1.06M* Mod 2045 (Beta-Adjusted) 60 2.19 0.37 19.36 0.03 3 -0.84 1.46

Difference -1.36 -1.32 -0.33 -0.07 0 0.07 -0.40


Difference -1.19 -1.15 -0.31 -0.06 0 0.06 -0.36


Difference -1.13 -1.10 -0.24 -0.06 -1 0.06 -0.35


Difference -0.94 -0.89 -0.35 -0.05 0 0.09 -0.39


6B-40

40

Active Return =

a)Return of the Effective Asset Allocation of Fund – (Beta * Return of the Benchmark)

+b)Weighted Average Pure (Net of Fee) Alphas of Underlying Funds

–c)Overall Fund Fee – Weighted Average Fee of Underlying Funds

+d) Other

Active Return Decomposition

6B-41

41

Underlying FundsFidelity Freedom 2030 Fund (Dec. 2006 – Sept. 2011)

Source: Morningstar Direct, Morningstar EnCorr and author calculations. For illustration only.

FSIGX

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11

Fund

Exp

osur

es (%

)

FSHNX FEDCXFSIPX FBNDXFFIDX FSEAXFDSCX FTHRXFDSCX FGRIXFBNDX FOCPXFMCSX FGOVXFDVLX FSEAXFTBFX FJPNXFIEUX FEQIXFSRRX FSIGXFCPGX FCPVXFSTSX FSOPXFEMSX FBGRXFDIVX FOSFXFAGIX SPHIXFINVX FIGSXFOHIX FDGRXFCSSX FDEQXFLVSX FSAEX

6B-42

42

Fidelity Freedom 2030 Sub-Fund Holdings(Dec. 2006 – Sept. 2011)


Fund Name Ticker Q4 2006 Q3 2011

Fidelity Disciplined Equity FDEQX 9.76% 7.58%

Fidelity Growth Company FDGRX 6.59% 7.14%

Fidelity Total Bond FTBFX 0.00% 0.00%

Fidelity Government Income FGOVX 2.45% 0.00%

Total 100% 100%

6B-43

43

Effective Asset AllocationFidelity Freedom 2030 (Dec. 2006 – Sept. 2011)


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11

Asse

t Clas

s Exp

osur

es (%

)

Cash

TIPS

Short-term Bonds

Intermediate-term Bonds

Long-term Bonds

Non-US Bonds

High Yield Bonds

Commodities

US REITs

Emerging Markets Equity

Non-US Developed Equity

US Small Cap Value Equity

US Small Cap Blend Equity

US Small Cap Growth Equity

US Mid Cap Value Equity

US Mid Cap Blend Equity

US Mid Cap Growth Equity

US Large Cap Value Equity

US Large Cap Blend Equity

US Large Cap Growth Equity

6B-44

44 Source: Morningstar Direct, Morningstar EnCorr and author calculations. For illustrative purposes only.

Asset Class Q4 2006 Q3 2011

U.S. Large Cap Growth Equity 16.18% 10.81%

U.S. Large Cap Value Equity 10.90% 10.69%

TIPS 0.61% 0.34%

Cash 3.57% 2.33%

Total 100% 100%

Effective Asset AllocationFidelity Freedom 2030 (Dec. 2006 – Sept. 2011)

6B-45

45

Out/Underperformance of Effective Asset Allocation(Dec. 2006 – Sept. 2011)

Source: Morningstar Direct, Morningstar EnCorr and author calculations. For illustrative purposes only.

Asset Class Q4 2006 Q3 2011 Average

U.S. Large Cap Growth Equity 5.58% -11.73% 0.80%

U.S. Large Cap Value Equity 8.02% -15.49% -0.63%

TIPS -1.27% 4.42% 1.78%

Cash 1.23% 0.00% 0.37%

Return of Effective Asset Allocation

6.79% -12.20% 0.00%

Beta Adjusted Morningstar Moderate 2030 Return

7.28% -12.68% 0.65%

Out/Underperformance -0.51% 0.48% 0.06%

6B-46

46

Asset Allocation ReturnFidelity Freedom 2030 Fund (Dec. 2006 – Sept. 2011)


-1%

-1%

0%

1%

1%

2%

2%De

c-06

Mar

-07

Jun-

07

Sep-

07

Dec-

07

Mar

-08

Jun-

08

Sep-

08

Dec-

08

Mar

-09

Jun-

09

Sep-

09

Dec-

09

Mar

-10

Jun-

10

Sep-

10

Dec-

10

Mar

-11

Jun-

11

Sep-

11

Quar

terly

Act

ive

Retu

rn

6B-47

47

Quarterly Alphas of Underlying FundsFidelity Freedom 2030 Fund (Dec. 2006 – Sept. 2011)


Fund Name Ticker Q4 2006 Q3 2011 Average

Fidelity Disciplined Equity FDEQX -0.41% -4.59% -0.92%

Fidelity Growth Company FDGRX 1.99% 1.67% 0.53%

Fidelity Total Bond FTBFX -0.15% 0.19% 0.04%

Fidelity Government Income

FGOVX 0.11% 0.14% 0.10%

Weighted Avg FF 2030 Fund Alpha

-0.32% -0.33% -0.25%

6B-48

48 Source: Morningstar Direct, Morningstar EnCorr and author calculations. For illustration only.

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

Dec-0

6

Mar-0

7

Jun-

07

Sep-

07

Dec-0

7

Mar-0

8

Jun-

08

Sep-

08

Dec-0

8

Mar-0

9

Jun-

09

Sep-

09

Dec-0

9

Mar-1

0

Jun-

10

Sep-

10

Dec-1

0

Mar-1

1

Jun-

11

Sep-

11

Quar

terly

Act

ive R

etur

nQuarterly Alphas of Underlying FundsFidelity Freedom 2030 Fund (Dec. 2006 – Sept. 2011)

6B-49

49

Active Return Decomposition – Fidelity Freedom 2030 Fund(Dec. 2006 – Sept. 2011)


Q4 2006 Q3 2011 Average Geometric Average

Fidelity Freedom 2030 Fund 6.58% -12.87% 0.45% -0.03%

Morningstar Moderate 2030 (Beta Adjusted) 7.28% -12.68% 0.65% 0.19%

Active Return -0.70% -0.18% -0.20% -0.22%

FF 2030 Effective Asset Allocation Return 6.79% -12.20% 0.71% 0.26%

Morningstar Moderate 2030 (Beta Adjusted) 7.28% -12.68% 0.65% 0.19%

(a) Asset Allocation Return -0.50% 0.48% 0.06% 0.07%

(b) Weighted Avg Sub Fund Alpha Return -0.32% -0.28% -0.25% -0.25%

Fidelity Freedom 2030 fund fee (overall) 0.1875% 0.1875% 0.19% 0.19%

Weighted Average Sub Fund Fees 0.1901% 0.1778% 0.19% 0.19%

(c) Fees -0.0026% 0.0097% 0.0000% 0.0000%

(d) Other 0.12% -0.39% -0.01% -0.02%

6B-50

50

Active Return =

a) Return of the Effective Asset Allocation of Fund – (Beta * Return of the Benchmark)

+b) Weighted Average Pure (Net of Fee) Alphas of Underlying Funds

–c) Overall Fund Fee – Weighted Average Fee of Underlying Funds

+d) Other

-20 bp

+6 bp

-25 bp

0 bp

-1 bp

Fidelity Freedom 2030 Fund Active Return Decomposition

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Fidelity Freedom 2030 Fund Cumulative Active Return(Dec. 2006 – Sept. 2011)


-5%

-4%

-3%

-2%

-1%

0%

1%

2%

Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Sep-11

(a) Asset Allocation Return(b) Weighted Avg Sub-Fund Alpha(c) Fees(d) Other

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Benchmarking Suggestions

1. Select a benchmark family with a similar a) glide path philosophy, b) asset class representation, and c) intra-stock / intra-bond approach.

2. Refine benchmark selection using “best fit” criteria.3. After selecting the “best fit” benchmark, use a custom beta-adjusted benchmark

for performance comparisons.4. Isolate underlying fund performance by calculating the weighted average alpha

of each target date fund.5. Decompose manager vs. benchmark performance differences into alpha

(positive or negative) from underline managers and other.

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Fund Performance and Attribution

► Asset class performance versus “basic” benchmark performance► Measures impact of the asset classes and asset class

allocations► Net target date fund performance versus asset class performance

► Measures impact of individual manager allocations► Gross target date fund performance versus net performance

► Measures impact of fees► Can add impact measurement from tactical asset allocation

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× Selecting a Target Date Benchmark× Qualitative

× Quantitative Measures of “Goodness of Fit”

× Using a Target Date Benchmark× Benchmark comparisons won’t tell you if glide path is “good”× Appropriate use of a benchmark is very difficult / data intensive× Key insights can include value added from:

× Detailed Asset Allocation × Sub-Fund Alphas× Fees× Other

Conclusions

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For Information and/or illustrative purposes only. Not for public distribution. ©2012 Morningstar. All rights reserved. Morningstar Investment Management is a division of Morningstar. Morningstar Investment Management includes Morningstar Associates, Ibbotson Associates, and Morningstar Investment Services; all registered investment advisors and wholly owned subsidiaries of Morningstar, Inc. The information contained in this presentation is the proprietary material of Ibbotson Associates. Reproduction, transcription or other use by any means, in whole or in part, without the prior written consent of Ibbotson Associates, is prohibited.

The Morningstar name and logo are registered marks of Morningstar, Inc. The Ibbotson name and logo are registered marks of Ibbotson Associates, Inc.

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Benchmarking Target-Date Funds: Art or Science? · Director of Investments Morningstar Investment...

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