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A Harsh Appraisal The article, by Massimo Massa, Rabih Moussawi, and Andrei Simonov, fiercely criticizes its subject. The authors find that target-date funds underperform other funds to a staggering degree. This shortfall occurs because target-date funds exploit their relatively captive audiences, which are unlikely to punish subpar returns by redeeming their shares. For a similar reason, target-date funds also get away with fee skimming. I agree with the authors initial assumptions. They are correct that target-date funds have unusually loyal shareholders who are relatively insensitive to both performance and costs. It is also true that those who promote target-date funds by which I mean not only fund companies, but also 401(k) sponsors, consultants, and the media have counseled target-date investors to invest for the long run. They have been instructed not to sweat the details. Finally, it is true that most target-date fund lineups have closed structures, meanin ....
The paper says managers do this by delivering lower performance of 2.9 basis points (bps) for each year from the vintage year. For an investor holding the fund for 50 years, that would mean a 21% reduction in performance. The researchers Massimo Massa, a professor of banking and finance at nonprofit university INSEAD; Rabih Moussawi, an associate professor of finance at Villanova University; and Andrei Simonov, a professor of finance at Michigan State University also say that TDFs invest in more expensive share classes of underlying funds because TDFs often invest in funds in their own fund family. “Indeed,” they write, “a longer investment horizon will potentially increase the agency problems, providing the manager with more opportunities to favor his family’s funds at the expense of his own performance.” ....
Regulating the 'Wild West' of Token-Based Business insead.edu - get the latest breaking news, showbiz & celebrity photos, sport news & rumours, viral videos and top stories from insead.edu Daily Mail and Mail on Sunday newspapers.