Why have target-date funds performed better in the COVID-19 selloff than the 2008 selloff?

Mao, Mike Qinghao; Wong, Ching Hin

doi:10.1016/j.jbankfin.2021.106367

Cited by 5 publications

(7 citation statements)

References 32 publications

(37 reference statements)

Supporting

Mentioning

Contrasting

Order By: Relevance

“…We contribute to the growing literature on defined contribution accounts and TDFs (e.g., Sandhya 2011;Elton et al 2015;Tang and Lin 2015;Balduzzi and Reuter 2019). This research is closely related to the two recent articles by Shoven and Walton (2021) and Mao and Wong (2022). Shoven and Walton (2021) provide a thorough analysis of the evolution of TDFs from 2010 through 2020.…”

Section: Prior Literature and Research Questionsmentioning

confidence: 92%

“…They find that near-dated TDFs experienced losses in values between 20% and 25% relative to further-dated TDFs that lost between 30% and 35% during this window. Mao and Wong (2022) investigate why TDFs performed better during the COVID-19 selloff of 2020 compared to the Financial Crisis selloff of 2008. They find a reduction in the level and cross-sectional dispersion during the most recent COVID-19 selloff.…”

Section: Prior Literature and Research Questionsmentioning

confidence: 99%

See 1 more Smart Citation

Target Date Funds, Drawdown Risk, and Central Bank Intervention: Evidence during the COVID-19 Pandemic

Iyer

Hoelscher

Mbanga

2022

JRFM

View full text Add to dashboard Cite

Target Date Funds (TDFs) have become the default investment choice in retirement accounts for most households. Later-dated TDFs (e.g., further away from the present day) allocate a more significant percentage of each dollar invested into equities relative to fixed income. As the TDF moves closer to the designated retirement date, the TDF embarks on its’ glide path. We study the impact of the COVID-19 Pandemic and Federal Reserve intervention on the max drawdowns experienced by TDFs during 2020. Later-dated funds experienced more significant drawdowns relative to near-dated funds. Moving out one target date fund increased the drawdown by approximately 1.90%. Approximately 80% of TDFs experienced their max drawdown on 23 March 2020. The max drawdowns of the TDFs are then studied in the following three sub-periods: (1) before the first Federal Reserve Intervention (2 March 2020), (2) after the first intervention and before the second intervention (16 March 2020), and (3) the period after the second intervention. TDFs experienced the greatest drawdowns after the first intervention by the Federal Reserve (approximately 19%) relative to the other two periods (approximately 7%). Fees associated with the TDFs tend not to influence the drawdowns except for the near-dated funds, where the low-fee funds performed better. Finally, near-dated funds recovered from their max drawdowns around September 2020, whereas later-dated funds did not fully recover until December 2020.

show abstract

Section: Prior Literature and Research Questionsmentioning

confidence: 92%

Section: Prior Literature and Research Questionsmentioning

confidence: 99%

Target Date Funds, Drawdown Risk, and Central Bank Intervention: Evidence during the COVID-19 Pandemic

Iyer

Hoelscher

Mbanga

2022

JRFM

View full text Add to dashboard Cite

show abstract

“…Real estate funds are excluded from the study due to their specific portfolios of highly illiquid assets and to the longer time they take to pay out investor redemptions. I also dropped target date funds because of their different investor flow dynamics (Mao et al 2022 ).…”

Section: Czech Investment Fundsmentioning

confidence: 99%

Meeting investor outflows in Czech bond and equity funds: horizontal or vertical?

Szabo

2022

Empirica

View full text Add to dashboard Cite

This paper explores liquidity management practices in Czech open-ended bond and equity funds. I reconstruct cash flows stemming from investors and securities, and cash flows related to purchases and sales in portfolios and margin calls to study liquidity transformation and liquidity management in investment funds. I study how portfolio illiquidity and current market conditions influence the joint behavior between investor redemptions and funds’ liquidity management. I point to a strong propensity to reduce the liquid buffers rather than sales of securities to meet redemptions in bond funds. The propensity increases with portfolio illiquidity. I show equity funds historically tended to dash for cash in response to investor redemptions during a severe market turmoil.

show abstract

“…In particular, we are the first to reveal substantial heterogeneity in flow patterns and the asymmetric flow-performance relationship among TDFs with different target horizons. One loosely related study to ours is Mao and Wong (2022), whose research question partly incorporates why TDFs fare better during the 2020 COVID-19 market crash than the global financial crisis of 2008-09. However, the sample period for their analysis on TDF flow-performance relationship ends before the COVID-19 market crash in 2019, and they do not examine whether there exists any asymmetry in the flow-performance relationship.…”

Section: Introductionmentioning

confidence: 99%

“…This paper contributes to the literature in following ways. First, we contribute to the growing literature that examine target date funds (e.g., Elton, Gruber, de Souza, and Blake, 2015;Balduzzi and Reuter, 2019;Brown and Davies, 2021;An and Sachdeva, 2022;Mao and Wong, 2022;Massa, Moussawi, and Simonov, 2022;Mitchell and Utkus, 2022;Parker, Schoar, and Sun, 2023). Our paper is the first to examine whether there is a large outflow out of TDFs around the March 2020 market crash, and whether there is any significant change in TDFs' flow-performance relationship-particularly with regards to its asymmetry-using the fund flow data since the outbreak of the COVID-19 pandemic.…”

Section: Introductionmentioning

confidence: 99%

Target Date Fund Flows Amidst the COVID-19 Pandemic

2023

Korean J Financ Stud

View full text Add to dashboard Cite

The popularity of target date funds (TDFs) has recently increased among defined contribution pension plans. Despite their growing importance, how TDF flows and flow-performance relationships have changed in response to the COVID-19 pandemic is yet to be examined, particularly during the March 2020 market turmoil, when bond funds witnessed unprecedented outflows. We find that short-horizon TDFs experienced sizable outflows of over $13.5 billion between February and April 2020, whereas mid- and long-horizon TDFs received inflows over the same period. Given that short-horizon TDFs hold a much larger fraction of their portfolios on fixed-income securities, the outflows from these TDFs, whose fund-of-funds investment structure has been identified as a source of intra-family liquidity provision in previous studies, may have compromised the effectiveness of this liquidity provision mechanism during the COVID-19 market crash. We find that in the aftermath of the pandemic, the flow–performance relationship of short-horizon TDFs becomes markedly more concave, which hints at investors’ greater awareness of the downside risks associated with large outflows following their experience during the COVID-19 turmoil.

show abstract

Why have target-date funds performed better in the COVID-19 selloff than the 2008 selloff?

Cited by 5 publications

References 32 publications

Target Date Funds, Drawdown Risk, and Central Bank Intervention: Evidence during the COVID-19 Pandemic

Target Date Funds, Drawdown Risk, and Central Bank Intervention: Evidence during the COVID-19 Pandemic

Meeting investor outflows in Czech bond and equity funds: horizontal or vertical?

Target Date Fund Flows Amidst the COVID-19 Pandemic

Contact Info

Product

Resources

About