Long-Term Fund Excels With 2020 Vision

What most fund managers refer to as the "long run" is often just a brief spell for Michael Finnegan.

"We are not trying to look a year, or two years, out," says Finnegan, co-portfolio manager of the $3.6 billion (PLWIX - Cramer's Take - Stockpickr)Principal LifeTime 2020 target date fund. "The very nature of this fund forces us to take a true long-term view."

So far his vision of the distant future has been quite clear. The fund has returned an average of 12.3% annually, enough to beat its Morningstar benchmark by 170 basis points, as well as earn the title of Lipper Leader.

Why Target Date Fund Is Leading the Race to 2020

"What happens in the market on a daily basis does not determine our success," says Finnegan. "We filter out the noise and stay focused on our strategic allocations."

Arriving at those strategic allocations has been the secret to the fund's success so far. Finnegan says the fund's managers engage in a four-step process.

First, they make long-term assumptions about the multiple asset classes covered in the fund. Next, they set the percentage weightings for each asset class.

Currently, the fund has a 36% weighting in U.S. large-cap stocks, 21% core fixed income, 17% international stocks, 9% small/mid-cap stocks, 6% preferred stocks, 6% real estate, 3% emerging market stocks and 2% high-yield bonds.

Like most target date funds, the fund increases its fixed income allocations as the target date approaches, adding the additional asset classes of ultrashort bonds and TIPs when retirement is in sight.