The Wall Street Journal-20080204-Investing in Funds- A Monthly Analysis- Fund Fiend- Target-Date Funds May Hit the Mark -- But Whose Mark-

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Investing in Funds: A Monthly Analysis; Fund Fiend: Target-Date Funds May Hit the Mark -- But Whose Mark?

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The stock market's plunge is providing the first stress test for dozens of target-date mutual funds, a type of investment that has become hugely popular in the past few years.

The concept behind a target-date fund is that the fund manager will automatically rebalance holdings to take a more conservative position as the fund approaches its "target" date.

Unfortunately, the current results aren't great for some investors who can least afford bad times: those closest to retirement. Thanks to hefty weightings in stocks, some target-date funds have posted double- digit losses over the past four months.

For example, OppenheimerFunds' Transition 2010 Fund, which holds about 65% of assets in stocks, lost 12.9% between Oct. 9, when the Standard & Poor's 500-stock index hit its most recent peak, and Jan. 22, when it hit its low. AllianceBernstein Investments' 2010 Retirement Strategy offering, which has 65% in stocks, was down 11.7%.

Investors in the funds did better than the index itself, which lost about 16% including reinvested dividends. Still, people planning to retire soon should look closely at their holdings to make sure they are in tune with the thinking of their fund managers.

Target-date funds have spread quickly since the 2000-02 bear market, as workers who once could count on old-fashioned pension plans decided that the do-it-yourself concept wasn't living up to its promise in their 401(k) plans. Target-date funds now hold about $177 billion in assets, up from $6.6 billion seven years ago, according to Financial Research Corp. And they're likely to grow in popularity, thanks to a 2006 federal law that makes it easier for employers to automatically enroll 401(k) participants in such funds.

The challenge for investors: Few target-date funds have track records showing how well they protect shareholders during a market downturn. Of the roughly three-dozen funds in Morningstar Inc.'s database, only seven predate the most recent bull market.

During the bull market, fund companies rolled out target-date funds with higher and higher weightings in stocks. Their reasoning: People stand a good chance of living 20 or 30 years beyond retirement, so the conventional thinking on owning lots of bonds on the day you retire is outdated. "Clients that are two years away from retirement are not two years away from needing the money," says Ranji Nagaswami, chief investment officer of AllianceBernstein. An Oppenheimer representative cites similar reasoning.

But could the more-aggressive stance also have something to do with the fact that until recently, in an increasingly crowded field, the bigger the stock position, the better the performance and the bigger the sales? Alliance and Oppenheimer say no.

Not all funds have gone the more-aggressive route. The 2010 target- date fund of Wells Fargo Advantage Funds has 26% of assets in stocks. It lost a slim 1.5% between Oct. 9 and Jan. 22. Wells Fargo points to data showing that most people pull money out of 401(k) plans at retirement. "We believe it's important to minimize risk as people decide what to do with their assets," a spokesman says.