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Thursday, March 24, 2016

Don't Launch Target Date Funds; Join Them

Reported by Neil Anderson, Managing Editor

Fundsters, if you haven't already caught target date fund fever, get out now while you still can. And if you insist on staying, don't launch your own: team up with manager-of-managers TDF folks instead.

Chris Brown
Sway Research LLC
Founder, Principal
New research from Newton, New Hampshire-based Sway Research highlights the harsh reality of the highly-concentrated target fund business. The industry research shop just released its first report on "the state of the target-date market", and founder Chris Brown looks forward to round two on the subject.

The report covers both off-the-shelf mutual fund TDFs and collective investment trusts (CITs), but not separate account or custom TDFs. (Brown hopes to add those in future editions of the report.) Here's what Brown writes to would-be TDF shops:

Barring a distribution partnership that assures a high level of sales and asset growth, or an incredibly compelling product in terms of investments and/or expenses, it makes little sense for any manager that lacks DC recordkeeping to launch a Target-Date series at this time.


"It's hard to justify creating a new product unless there's something unbelievably compelling," Brown tells MFWire.

Here's how scary the TDF business is for the unwary. 63 percent of TDF assets (in mutual fund and CIT form) are with just three providers: Vanguard [profile], Fidelity [profile], and T. Rowe Price [profile]. A fourth, Charles Schwab [profile], singlehandedly controls 31 percent of the multi-manager target business. And asset managers that have their own 401(k) recordkeepers hold 83 percent of all target date mutual fund and CIT assets. Even recordkeepers' own TDFs are no longer safe.

90 percent of TDF assets are with the 10 biggest TDF shops: and only one of those, BlackRock (which also happens to be the largest asset manager in the world), is not also a retirement plan provider.

Your hope for getting a piece of this growing pie may be in multi-manager products. The five big suites are Schwab, John Hancock [profile], Great-West/Empower [profile], State Farm [profile], and Callan Associates.

"There's definitely opportunity in multi-manager," Brown says. "There's assets there. There's flows there."

Brown finds that multi-manager grew at 19 percent for the past two years, nearly double the growth (11 percent) of proprietary TDFs, and some proprietary TDF managers like Principal [profile] blur the lines by using investing their TDFs into their proprietary yet subadvised funds. Yet multi-manager TDFs still have a long way to go: they now hold four percent of assets, compared to the 93 percent in proprietary TDFs. (The rest is split between TDFs that invest in individual securities and TDFs that include a combination of proprietary active funds and third-party passive funds.)

The 66-page Sway report offers data on the 100 biggest TDF mutual fund and CIT product suites and digs into a host of other statistics on the niche. 

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