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Lifecycle funds offered to retirement plan participants gradually reduce their exposure to stocks as they approach the target date of retirement. We show that such deterministic switching rules produce inferior wealth outcomes for the investor compared to strategies that dynamically alter the allocation between growth and conservative assets based on cumulative portfolio performance relative to a set target. The dynamic allocation strategies proposed in this paper exhibit almost stochastic dominance (ASD) over strategies that switch assets unidirectionally without consideration of portfolio performance.

We examine the conditional market timing performance of UK unit trusts between January 1988 and December 2002. We find no evidence of superior conditional market timing performance by UK unit trusts either across different portfolios of trusts or by individual trusts. We also find that benchmark investing is significant for UK unit trusts and trusts have high numerical risk aversion to deviations from the benchmark. Our findings suggest that UK trusts act like benchmark investors. Copyright 2006 The Authors Journal compilation (c) 2006 Blackwell Publishing Ltd.

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