Regular readers of the friday view will know how a few weeks back I wrote about exchange traded funds (ETFs) and how their ‘marriage’ with institutional investors has never really gelled. Well, I’m beginning to wonder if it’s something to do with three-letter acronyms because this week it’s the turn of target date funds (TDFs).
When the National Employment Savings Trust (NEST) opted for TDFs as its default investment strategy back in 2010 you’d be forgiven for thinking other employers and/or trustees updating or putting in place defined contribution (DC) schemes would do the same.
After all, NEST is a national savings scheme which has to shoulder the responsibility of potentially millions of people saving into a pension for the first time, so no doubt a lot of time and care went into choosing the investment strategy. But barring a few instances, it seems that the UK DC market has been slow to follow NEST’s lead on this.
There are a number of reasons. For starters, the vast majority of DC schemes are currently invested in a lifestyle strategy and it is a huge task for employers to transfer existing members to a TDF. Then there is the shift from trust to contract- based provision which has meant asset managers need to convince insurance companies there is a demand for TDFs which there currently doesn’t seem to be.
However, a big part of TDFs’ stuttering start comes down to investment consultants, which as we all know are the ‘gatekeepers’ of investing, granting schemes access to strategies and asset classes they research and then rate. I suspect in some, but not all, circumstances consultants feel their position in the value chain is somewhat threatened by TDFs. Consultants have typically added value by picking best of breed and packaging that together for clients, but with TDFs this process is removed. There is nothing in it for them and so why would they push it as a strategy to their clients?
Blackrock predicts assets in UK TDFs will quadruple to £8bn by 2018. Indeed, there are compelling reasons for their use as a default strategy: managing assets in a single fund is cheaper, less risky and more streamlined. They won’t be right for everyone, but should be championed by consultants if it is the best strategy for their clients.
I believe TDFs will develop into the vehicle of choice for default DC and it is just a matter of time before consultants embrace the fear and TDFs become part of the investment toolkit they take to their clients. Only time will tell.
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