Set the Investment Switch to 'Cruise Control'
Life-cycle funds aim to carry investors to retirement with an absolute minimum of decisionmaking ... and worries
NEW YORK — The Greyhound bus company said it first, but when it comes to one new breed of mutual funds, you can definitely "leave the driving" to the fund.
Life-cycle funds, new-kids in the fund crowd, offer the investment equivalent of cruise control.
Most mutual funds already "leave the driving" to a professional manager, relieving you of the burden of deciding which stocks or bonds to buy and when. But you still need to tinker - adjusting the mix annually for changes in the market.
And if retirement is your goal, the mix needs a tune up every few years as you get closer to the golden age. You might want to lower the risk profile of your investments.
Life-cycle funds go one step further - no muss, no fuss.
Life-cycle funds invest in a mix of stocks, bonds, and money market instruments. The mix is determined by the age of the targeted customers.
Which fund you buy depends on how far away you are from retirement. Beyond that, goes the theory, you don't even get your hands dirty thumbing through a newspaper's fund listings.
The fund is designed to build money during all stages of your life.
If you buy it more than 10 years ahead of retirement, it starts aggressively, then grows increasingly conservative as you age.
The Fidelity Freedom 2030 fund offers a case in point.
Targeted at people retiring in 2030, the fund right now is big on stocks: 85 percent plus 15 percent in bonds.
As 2030 nears, the mix becomes conservative.
Not everyone peddles the virtues of life-cycle funds. Some analysts spurn them as limiting individual decisionmaking (see story, left).
But the funds have made it onto the menus of the biggest fund families: Fidelity, Vanguard, and T. Rowe Price among them. Dreyfus offers a life-cycle series called Lifetime, and Kemper has Horizon funds.
Fidelity tailors its Freedom Funds to four retirement dates: 2000, 2010, 2020, and 2030.
If you expect to retire in between two of those years, you could split your money between two of the funds.
Often the fund family offers several funds, such as an aggressive, stock-heavy fund for young working people; a moderate portfolio for those nearing retirement; and a conservative, income-oriented fund for people now retired.
Vanguard Group holds some $2.5 billion in four such funds, says spokesman John Woerth.
Vanguard LifeStrategy Growth Fund. For investors in their 20s and 30s, the fund is currently 80 percent stocks, 20 percent bonds.
LifeStrategy Moderate Growth Fund. If you're in your 40s and 50s, it will typically hold 25 to 50 percent stocks, 30 to 60 percent bonds, plus some cash.
LifeStrategy Conservative Growth Fund. It's for folks interested in early retirement, and is even more bond-oriented.
LifeStrategy Income Fund. For retired people, it is high on bonds, with a steady income flow.
Life-cycle funds rolled out around 1993, and most haven't attracted billions in assets.
Morningstar, the Chicago financial services firm, tracks 25 of them. None has yet garnered the three years of continuous monitoring necessary to gain a star rating from Morningstar.
Nevertheless, the funds have begun to establish a track record.
For the 52 weeks ending March 28, 1997, the life-cycle group was up 11.48 percent, about half as high as the Standard & Poor's 500 index. Some funds, however, have almost equaled the S&P.
The funds invest assets in different ways.
Some are "funds of funds," which invest only in other mutual funds within their fund family.
Others are passively managed index funds. Some have a manager actively picking stocks and bonds. Some blend indexing and active management.
One advantage - during market downturns, life-cycle funds generally hold up better than other equity funds.
"That's because they have bonds in the funds," says Sheldon Jacobs, editor of The No-Load Fund Investor newsletter in Irvington-on-Hudson, NY.
"You could achieve the same results simply by having a balanced portfolio," including stock funds, bond funds, and money market accounts, Mr. Jacobs says.
More traditional asset allocation funds have similar mixes.
Still, the funds attract investors who consider themselves unsophisticated, or who lack the time to track their funds, says Mr. Woerth of Vanguard.
Peter Van Dyke, president of the three T. Rowe Price Personal Strategy Funds, says his three cycle funds offer a broad diversification of stocks and bonds.
The growth fund has been successful, according to Morningstar. (See chart above.) It targets someone with a time frame of 10 to 15 years and usually holds about 80 percent equities (though that amount has been cut back recently), 18 percent bonds, and 2 percent cash.
Some 16 percent of the equity holdings are foreign companies. Other holdings include blue-chips General Electric and AT&T.
A committee of Price's top fund managers monitors the funds at least monthly and makes "changes slowly, but persistently," says Van Dyke.
The main benefit of life-cycle funds is that they enable average investors to have an asset allocation plan - a strategic blend of stocks, bonds, and cash - designed for their age.
But that's also their problem, says Morningstar analyst Cebra Graves.
It's a one-size fits all approach, not tailored to the needs of individuals.
And investors can already do asset allocation by selecting their own mix of stock, bond, and money market mutual funds, and adjusting that mix over time.
For example, not every 65-year-old needs or wants 20 percent in stocks and 80 percent in fixed income, say experts.
In fact, with life spans lengthening, some analysts recommend keeping a substantial portion in stocks, to keep capital growing during retirement.
Life-cycle funds, while attractive in terms of return, "are not a free ride," says Sheldon Jacobs, editor of The No-Load Fund Investor in New York.
He gives an example:
"Let's say your stock component in the fund is down 10 percent, while your bond component is up 15 percent, giving you a net gain for the year.
"If you had instead owned an equity fund and a bond fund, you might have been able to take a tax loss on your equity fund. But you can't do that if both your equities and bonds are in the same fund, and the fund is up."
Also, some people might want to buy individual bonds for their fixed income, to avoid fund management fees.
Mr. Jacobs adds, "Say you are in a high tax-bracket, and your fund has a lot of taxable bonds. What you need are tax-free bonds. Why then buy any fund that doesn't specifically meet your particular needs?"