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Target date fund firms under pressure as sales disappoint

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Target date funds have failed to gain traction among investors and resulted in disappointing sales as experts question whether the UK market could follow the success seen in the US.

TDFs have traditionally been used by occupational pension schemes but have not been widely available to UK retail investors until recently, with firms such as Vanguard, Architas and AllianceBernstein offering new ranges.

But Hargreaves Lansdown head of passive Adam Laird says a number of funds, including TDFs from Fidelity International, have failed to raise assets and gain traction with investors, potentially putting off other launches.He says: “Fidelity’s Target fund range 2020, 2025 and 2030 have struggled to raise assets.”

The 2020 fund is currently around £21m, the 2025 fund is £3.3m and Target 2030 is £4.1m, which Laird says is “very low” for a sustainable fund.

The Architas Birthstar Target Date range, made up of seven funds and launched in January 2015 in a joint venture between Architas and AllianceBernstein, is currently at just under £3m.

Vanguard’s range, which was launched in April, covers nine funds and has so far attracted £2.2m.

But Square Mile head of risk-based solutions research Alex Farlow says when Fidelity launched it was the only provider to offer TDFs in the UK so comparisons are difficult.

“In principle, target date funds seem the ideal vehicle for people. They are a slightly more sophisticated extension of the old lifestyle funds as there is more discretion for the manager to take more risks. But we haven’t seen enough yet.

“Compared with the lifestyle ones, where they were full equity and then gilts, people today retire later so they remain invested so I don’t know if target date funds are still relevant.”

In the past 10 years, target date fund assets in the US have increased from $116bn (£81bn) to $763bn, according to the latest Morningstar research.

Finametrica director and co-founder Paul Resnik says: “TDFs for 401(k)s in the US are ‘sandboxed’ to use a UK term. The managers have an exemption from professional liability. It would be a shame if a similar exemption was allowed in the UK. Workers deserve better.”

Experts argue TDFs might fail to succeed because they do not take into account market dynamics, such as volatility or any dramatic moves.

AJ Bell Investment director Russ Mould says the principle behind TDFs is “terrific” but admits there are dangers.

He says: “There is an emotional involvement in trying to time the market as it is such a difficult thing to do.

“One issue with TDFs is that you may pay higher fees, but the bigger issue is the risk of the glide path of automatic rebalancing could take you out of equities when they are cheap and into bonds when they are expensive because it is a fairly automatic process.”

AllianceBernstein head of investment delivery David Porter says: “In the IFA market target date funds are still the new kid on the block, as advisors try to find the best allocation to ‘solutions based investing’ within a client’s portfolio.

“Given recent heavy weight entrance into the institutional and retail target date fund market and the clear benefits of this strategy in the robo-advice space, we believe given time, the take-up in the UK retail space is set to follow the strong growth seen in UK DC pensions.”

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