Target Date Fund Performance Evaluation Using Benchmark Wealth Ratios
Find Innovative SolutionsGenerate Solutions
Solution Overview
Problem
Current methods lack an objective, returns-based measure for evaluating the performance of target date funds, which are complex investment vehicles with varying asset allocations over time, making it difficult for investors to select the most suitable fund family and assess their ability to maximize wealth by a specific target date.
Innovation Solution
A method is developed to construct a model that incorporates realized rates of return for a family of target date funds, using a benchmark portfolio to estimate wealth generation and compare the propensity of each fund family to achieve target date wealth, providing a ratio (TDPM) that compares wealth generated by each family to a benchmark portfolio.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Measurement precision
If traditional mutual fund performance measures are used for target date funds, then evaluation is simple, but the measures are inappropriate because target date funds have varying asset allocations over time
Solution Approach 1:
The patent segments the target date fund evaluation into multiple components: constructing a model of the fund family, constructing a benchmark portfolio model, determining realized rates of return for each, and calculating the TDPM ratio. This segmentation allows for precise measurement of fund performance while managing complexity through systematic breakdown of the evaluation process
Solution Approach 2:
The patent introduces a benchmark portfolio as an intermediary element to mediate the comparison between target date funds and standard performance measures. The benchmark portfolio serves as a reference point that accounts for the time-varying nature of target date fund allocations, enabling appropriate performance evaluation without requiring direct comparison to static mutual fund measures
2Reliability
If investors rely on subjective assessments of target date fund performance, then evaluation is easy, but objectivity and reliability are compromised
Solution Approach 1:
The patent establishes a feedback mechanism by calculating the TDPM ratio that compares realized rates of return against benchmark portfolio returns. This objective feedback metric allows investors to reliably assess fund performance without subjective bias, while the automated calculation process maintains ease of operation through systematic data collection and computation
Solution Approach 2:
The patent changes the evaluation parameter from static mutual fund performance measures to dynamic realized rates of return that capture the time-varying asset allocations of target date funds. This parameter change enhances objectivity by measuring actual performance under varying conditions while maintaining operational simplicity through standardized calculation methods
3Measurement precision
If comprehensive data collection for all target date funds is performed, then evaluation accuracy is improved, but time and resource requirements increase
Solution Approach 1:
The patent applies preliminary action by constructing models for both the target date fund family and benchmark portfolio before determining realized rates of return. This preparatory modeling establishes the analytical framework in advance, allowing for efficient and accurate performance measurement without requiring extensive data collection and processing time during the evaluation phase
Data Source
AI summary
A method of evaluating the performance of a family of target date funds. A model of the family is constructed using realized rates of return (“returns”) for an evaluation period for each of the funds. The returns for each fund are assigned to the periods of the model corresponding to the periods during which the return was realized by the fund. An estimate of the wealth generated by the family may be determined as a function of the returns assigned to the model and a pattern of contributions. A benchmark portfolio may be selected and used to construct a model of the benchmark portfolio having the same number of periods as the model of the family. The model of the benchmark and the pattern of contributions may be used to determine wealth generated by the benchmark portfolio, which may be compared to the estimate of wealth generated by the family.