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Monday, July 09, 2012

TDFs Are More Complicated Than You'd Think

News summary by MFWire's editors

For target-date funds, strategies for hitting targets are as varied as the basic concept is simple. Indeed, the asset-management industry continues debating the best design for TD funds, reports Michael Pollock for the Wall Street Journal.

There are those professional market observers who see a wide range of tactics as helping the marketplace, including Josh Charlson, a senior mutual-fund analyst at Morningstar Inc -- "I don't think there is one right solution—the various approaches all have intellectual validity."

But that doesn't negate the fact that having so many different strategies makes comparing fund performance and evaluating the potential risks of different management styles exceedingly difficult.

Despite it all, money is pouring into target-date funds, which many plan sponsors have designated their plans' default investments. Current assets total around $400 billion, more than five times that of the end of 2005, according Morningstar. In fact, in ten years, target-date funds could represent half of all assets in U.S. 401(k) and other defined-contribution plans, says David Bauer, a partner at Darien, Connecticut-based consulting shop Casey, Quirk & Associates.

The WSJ outlined a number of fundamental target-date strategies and the firms that employ them. These include:
  • Diverging Glide Paths
    T. Rowe Price manages funds through retirement, while ING Investment Management manages to retirement. Meanwhile, firms adopting more conservative glide paths include Principal Financial Group, which has trimmed equity allocations for funds close to their target dates.
  • More diversification, new assets
    Companies like Fidelity and Putnam Investments are trying to soften the impact of stock volatility on target-date funds. Fidelity has been replacing stocks and conventional bonds with Treasury inflation-protected securities, commodities, floating-rate loans, emerging-markets debt and real-estate debt. Putnam's target-date portfolios will comprise 55 percent absolute return and 25 percent equities at their target dates, which is unusual for the industry.
  • Active vs. passive management
    Passively managed stocks have been generating stronger demand, possibly because of their lower management expenses and skepticism among some defined-contribution sponsors about the efficacy of active management. The industry leader in indexing is Vanguard

Edited by: Irene Park

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