Tue Jul 17, 2012 10:42 am EDT NEW YORK(Reuters) — Target date fund managers are branching out into new products, asset classes and lowering fees as these funds continue to become a predominant investment choice in 401(k) plans, according to a study released on Tuesday.
A target date fund is a type of mutual fund that adjusts its allocations based on a specific target date, typically changing holdings to become more conservative as the date approaches.
From 2009 to 2011, the average asset-weighted target date fund allocation to commodities, real estate and Treasury inflation-protected securities (TIPS) more than doubled to 7.2% from 3.6%, according to the study, conducted by BrightScope Inc., which researches and rates 401(k) plans.
Some target date funds have more than a quarter of their allocations dedicated to these asset classes, according to BrightScope.
For example, institutional shares of the Allianz Global Investor Solutions 2015 Fund had 40.7% of its portfolio in commodities, TIPS and real estate, up from 24.7% in 2009.
Fidelity Investments’ Freedom Income Fund had 14.7% in these asset classes in 2011, up from 2.3% in 2009.
The shift is significant because many target-date managers do not invest in any commodities, real estate or TIPS, said Eddie Alfred, vice president of data and research at BrightScope.
For firms like Allianz, much of that increase in allocation is due to managers investing more in TIPS. “We have shortened our longer Treasury exposure and upped our TIPS exposure because the 10-year Treasury has really lost purchasing power,” said Mark Hathaway, portfolio specialist.
An increasing number of target date fund managers are looking at areas like TIPS because they are concerned about the long-term implications of inflation on returns, said Josh Charlson, an analyst at Morningstar Inc.
“Investors and advisers just need to understand how their managers are using these asset classes and what their expertise is,” he said. “Even TIPS carry their own kinds of risks.”
At the same time, many target date managers are increasing their allocation to exchange-traded funds, according to BrightScope.
Franklin Resources’ Franklin Templeton Investments, The Hartford Financial Services Group, ING Index Solutions and Nationwide Financial are among the managers that have increased their allocation to ETFs over the past couple of years, according to BrightScope.
Given recent regulations that require greater disclosure of 401(k) plan fees to employers and plan participants, more firms may add ETFs because they can be cheaper than their mutual fund counterparts, said Brooks Herman, head of research at BrightScope.
From 2009 to 2011 expenses on target date funds decreased to 0.72% from 0.75%.
Meanwhile, some firms have gotten out of target date funds altogether. In the past few months, Oppenheimer Funds, Goldman Sachs Asset Management and Columbia Funds have announced or have closed their target date funds after failing to gain significant assets.
Columbia has $196 billion in target date fund assets, Oppenheimer has $624 billion and Goldman Sachs has $67 billon.
The new trend shows how difficult it is for asset managers to gain market share in the target date fund space, Alfred said.
The largest recordkeepers of 401(k) plans essentially act as gatekeepers over what funds go into these plans, and many of them, like Fidelity, Vanguard and T. Rowe Price Group have their own target date funds that they put in plans, he said.
“Fidelity, Vanguard and T. Rowe have 75% of the target date funds space,” he said. “Everyone else is competing for scraps.”
(Reporting By Jessica Toonkel; Editing by Walden Siew, Leslie Adler and Kenneth Barry)
© 2011 Thomson Reuters. Click for Restrictions.
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