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After 'a lot of flak' Fidelity Investments does a study and pledges to change how it manages its $170 billion of target date funds

The Boston giant announces findings to justify its surprising embrace of stocks but skeptics say Fidelity is under pressure to conform with rivals T. Rowe Price and Vanguard Group

Author Brooke Southall September 27, 2013 at 4:56 AM
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Robert Boslego

Robert Boslego

September 27, 2013 — 4:16 PM

According to another report, Fidelity’s Bruce Herring, group chief investment officer of the global asset allocation division, also said their outlook for bonds played a role. I totally agree with that. I think bonds are riskier than stocks for the next 5-10 years and could pose big trouble for retirement portfolios that are heavily invested in bonds.

Philip Chiricotti

Philip Chiricotti

September 27, 2013 — 6:10 PM

Fees are important, but I don’t think they are responsible for the underperformance of Fidelity’s target-date funds.

Net of revenue sharing, their “K” series is quite competitive. Indeed, T. Rowe Price has been on a roll with comparable fees. Also worth noting that the low cost TDFs offered by Vanguard have not topped the charts. They have delivered consistently above average returns, but no chart topping. On a risk/reward basis, TIAA-CREF and American Funds have both bested Vanguard.

As noted by observers, multiple factors are no doubt in play, including forward looking capital market forecasts that indicate shifting risk/return characteristics between equities and fixed income.

Fidelity’s clients have also no doubt noted that their equity allocation was more conservative than the majority of their peers, particularly T. Rowe and Vanguard. Fidelity’s custom benchmark aside, they may have concluded that they needed to change their equity allocation to remain competitive.

Some of their recent asset allocation shifts, particularly in the commodities area, were poorly timed and detracted from their core competency. By increasing their allocation to equities, they are focusing on their key investment strength, the management of active stock funds.

Recoveries are always uneven, but forecasters have consistently under estimated the growth in the U.S. economy. Indeed, the lack of national leadership aside, it is hard not to be bullish on the U.S. economy. The energy transformation is also a huge and generally unrecognized bullish factor. Increasing equity allocations after an extensive bull market run is, however, no walk in the park.

Philip Chiricotti
Center for Due Diligence

Brooke Southall

Brooke Southall

September 27, 2013 — 6:34 PM


This is excellent back story to the back story.

much appreciated,


Stephen Winks

Stephen Winks

September 27, 2013 — 7:39 PM

Thematically, client outcomes have become far more important than singular investment performance especially with retirement assets for those in retirement with out the time to recover from under performance. Ron Surz’s caution that retiree risk may not be fully appreciated should be heeded. In today’s perilous investment environment where the Quantitative Easing music must eventually stop do we have the discipline in place to mitigate significant market correction?

I hope every Target Date Fund has a mechanism to protect assets should a significant down turn occur, even if it is not fashionable to suggest anything but blue sky.


Robert Boslego

Robert Boslego

September 27, 2013 — 8:08 PM


The cumulative daily returns of the big 3 target date fund families can be nearly replicated by allocations using just 2 ETFs (one stock, one bond) and do not protect assets when prices drop.

The ETF strategies require no thought, if you know what I mean.


Elmer Rich III

Elmer Rich III

September 27, 2013 — 11:25 PM

Of course, it’s always best to have independent academic and experimental studies and make the data public for others to analyze – but our industry only really does “research” for sales uses. Ho hum

Independent research says fees are the biggest contributor and Morning start styles, for example are useless.

There will be no progress in finance and investment practices until the “black boxes” are retired and free data is available. There is no way to know if anything Fido says is factual or evidence-based. All we know is what the PR dept. puts out.

“As noted by observers, multiple factors are no doubt in play, including forward looking capital market forecasts that indicate shifting risk/return characteristics between equities and fixed income. “ Where is there any evidence for this statement?

Philip Chiricotti

Philip Chiricotti

September 28, 2013 — 12:24 AM

Elmer: You should buy a dog and get some love in your life. The evidence is obvious to those that know what they are talking about, i.e., consultants truly knowledgeable about Fidelity. You are an outsider not capable of looking inside at the essence. A waste of time to interface with you.

Elmer Rich III

Elmer Rich III

September 28, 2013 — 2:48 AM

Ah, the classic personal attack to dodge a question. So instead of answering legitimate questions – Phil C personally attack the questionnaire. It’s a tactic called “Atatck the messenger.” A very tired and unprofessional tactic – but it works.

Like the dog mention, sleazy but a crowd pleaser.

I have worked with Fidelity since 1991 when they proclaimed that 'This 401k thing is gonna go nowhere.”

Look, Fido is one of the Big Dogs so everyone wants to make nice and get sponsorship money. i have no interest in any check from them. Phil, has conferences to fund, and profit personally from, so he will lead the charge on flattery. Understandable.

Fido also will show it’s “teeth.” We criticized or questioned them years ago and they stalked us online and sent us a Cease and Desist letter. Little ole us! Fair enough, they have always been heavy handed.

Here they are effectively saying:

- There is a problem with TD funds

- We have studied it internally

- We have solved the problem

OK, since this was all internal it is currently only a sales claim. There is no way to know if any of their statements are true. That is typical for sales organizations but not professional ones.

The financial services industry, because of the web, can no longer promote platitudes and business claims with no evidence. The web reveals all. Just a fact of life now.

Philip Chiricotti

Philip Chiricotti

September 28, 2013 — 3:50 AM

You will need at least two dogs.

Elmer Rich III

Elmer Rich III

September 28, 2013 — 12:37 PM

OK. Phil wants to make it personal rather than professional. Let’s unpack his personal side.

As the promoted “Center for Due Diligence” let’s do some due diligence and ask how much Phil personally, or any entity he benefits from, has received from Fidelity over the last, say, 10 years?

Let’s also ask if there is a “Pay to play” set of business practices for the conferences.

Fair questions?

Stephen Winks

Stephen Winks

September 28, 2013 — 2:45 PM

Thanks Robert,

I appreciate that TDF vendors leave it to the consumer when the you know what hits the fan.

Thus my hopeful query “let’s hope TDF vendors have a mechanism to protect capital when things go wrong” which is an increasingly likely scenario as QE is tapered.

Robert, our industry is set up only for only good news and the music is about to stop. TDFs as you cite are selling a false choice for security. It is clear to you, because you have spent decades managing commodity (oil, etc.) pricing risk for our largest corporations.

I hate the fact that unprotected retired investors are headed for a highly likely disaster.


Robert Boslego

Robert Boslego

October 7, 2013 — 3:22 AM

According to a new Allianz Life survey, 84 percent agreed that investors should always have protection from loss, even if it reduces potential gains. This flies in the face of the Fidelity study that small investors have more stomach for risk.

Brooke Southall

Brooke Southall

October 7, 2013 — 3:42 AM


A big life insurance company says investors should always protect themselves from loss….with life insurance par chance?


Robert Boslego

Robert Boslego

October 7, 2013 — 4:04 AM


This survey is not about life insurance. It’s about retirement portfolios. “Those with $200,000 in Investable Assets Say Volatility Drives a Desire for Balanced Approach.”

“The vast majority of Americans ages 25+ with more than $200,000 in investable assets surveyed in the Allianz Life 2013 Investor Market Perceptions Study said they are seeking some form of protection from losses as they accumulate assets for retirement. In total, 95% of these respondents said they would like a financial product with no potential loss or at least some level of protection from loss rather than one with unlimited potential growth but also unlimited potential loss.”

Buy-and-hold strategies, regardless of loss potential, is no longer acceptable for many individual investors, perhaps the vast majority, as Allianz has found. If Fidelity says investors can stomach big risk because many didn’t pull out, they are not assessing the stomach-wrenching that was present for many investors, especially those approaching retirement.


Elmer Rich III

Elmer Rich III

October 7, 2013 — 4:23 PM

Behavior is all biology and physiology, of course. Thinking, consciousness and “decision making” and subjective experiences have been proven to be largely cultural constructs with weak predictive value on financial behavior.

As the population ages basic biological and physiological factors dominate. For example:

“The wisdom of aging may not apply to economic decisions. In a study of choices make about money, the oldest people performed the worst—even beating out the usual bad-decision champions, adolescents.

“Most important real life decisions are taken under conditions of uncertainty,” she says. When we invest in the stock market or choose a health insurance plan, we have to weigh unknown risks and payoffs. And we may have a harder time making those decisions as we age”

Finally, “risk” is just a sales term for loss. All animals are hyper-avoidant of any suggestion of loss or threat. Humans are overly and harmfully reactive to imagined losses and threats. But that’s how our brains evolved. There is, effectively, no way to teach, talk people out of this behavior.

As we age these weaknesses in brain function accelerate – more so in men. These are medical facts.

R. McAloon

R. McAloon

November 4, 2013 — 10:38 PM

The underperformance by the Freedom Funds are not due to fees. Fidelity underperformed by a couple of percentage points which is massive considering the correlation among rival funds is VERY high. If you delve a little bit more into the core holdings of the Freedom Funds, you will notice that Fidelity took a sizable bet on inflation-protected securities and commodities over the years. The percentage of total assets for these two classes stretched as high as 14% for some of the funds. Absolutely pathetic.

Fidelity is announcing changes to the set-up and allocations within the Freedom Funds within the next couple weeks and unfortunately for them this is going to open pandora’s box. The last thing anyone wants to see with a money manager is a significant shift in style especially if it spurs from a bad bet. I expect a significant increase in equity allocation with a sharp decrease in commodities and a minor decrease in fixed income. It appears as though Fidelity purposely set up allocations the way they did, and now that the underperformance has caused a shift in investment style for the funds, they will for sure have their tails tucked between their legs until they can outperform or atleast track their benchmark.

Another point worth noting is the lack of experience and slight conflict of interest with these funds. The author mentioned it but there is a bias because they use their own actively managed funds. I see an average of 21 distinct managers working on behalf of Freedom Funds (above average than most target dates) with an average experience of 4 years (significantly below average than most target dates). At this point companies would be better off setting up a custom QDIA using only 2 or 3 funds to track a specific benchmark.

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