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Measure how well a target date fund has surfed the highs and lows
8-minute read
THE TAKEAWAY
Use overall capture ratio to help evaluate target date success
Overview
Multi-Asset Investment
Director
Investments with multiple, changing objectives can be challenging to evaluate.
Upside capture ratio – a measure of how well a fund did relative to a market index during periods when the index rose – can help gauge how fully a fund participates when markets appreciate. Similarly, when markets decline, downside capture ratio is used to measure how well the fund limited losses compared to the index. But how well do these measures work for a target date fund (TDF), which has to balance appreciation and preservation objectives both for young participants as well as those nearing retirement?
Like surfers, successful TDFs must ride the strong market waves without wiping out when the surf eventually crashes. To evaluate how effectively a TDF has achieved that balance, consider dividing the upside by the downside capture. The resulting overall capture ratio may help measure how well a fund balances building and preserving wealth.
The problem
TDFs are fast becoming a primary retirement vehicle for many U.S. workers, yet many investors lack the tools to evaluate how well their TDFs are helping them reach their retirement goals.
A potential solution
In combination with other factors, overall capture ratios may help measure the effectiveness – and desirability – of a target date series over time.
Impact
See overall capture in action
These two infographics show how to determine a fund’s overall capture ratio and use it to assess effectiveness
This example is hypothetical and for illustrative purposes only.
The hypothetical fund in this example gained 3% less than the index when the market rose, but dropped 5% less when the market fell. Thus, it did a good job of balancing the market’s waves.
A look at a sampling of target date series in the marketplace shows that funds can have starkly different upside, downside and overall capture ratios.
Source: Morningstar ©2024 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Capture ratio reflects the annualized product of fund versus category average returns for all months in which the category average had a positive return (upside capture) or negative return (downside capture).
This example shows how funds with the best upside or downside capture may not be best at balancing market and longevity risk. Fund A didn't have the best upside or downside capture ratio, but it had the best overall capture ratio.
Are you using the right measurement for target date funds?
Target date funds are fast becoming the primary retirement vehicle for most American workers, yet many lack the proper tools to evaluate how well they contribute to participant outcomes.
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