An Empirical Examination of Lifestyle Mutual Funds

Abstract

Lifestyle or static allocation funds are designed to expose investors to a certain level of risk. The asset allocation is constant and does not change over time. The fund manager’s job is to ensure that the level of risk does not exceed the fund’s target risk. These funds have also been become the popular investment choices in several 401(k) and IRA pension plans. This study looks at the absolute and risk-adjusted performance of three lifestyle mutual fund categories (aggressive, moderate, and conservative) from January 1994 to August 2017 and compares them with various stock and bond benchmark indexes. The authors find that lifestyle mutual funds have underperformed benchmark indexes and index funds with lower absolute and risk-adjusted performance from January 1994 to August 2017. They also compute the seven-factor alpha (Carhart four factors plus excess returns of FTSE All-World ex US, Barclays Aggregate Bond Index, and Citi World Government Bond Index) during this time period. They find that all three categories of lifestyle funds have negative net alpha during the entire period. Gross alphas for all three lifestyle fund categories are negative but insignificantly different from zero. These results indicate that lifestyle mutual funds are successful in security selection but charge fees to deliver outperformance that are too high.