Canadian Investment Review

Interest rising in active/passive hybrid strategies for TDFs

Written by Staff on Tuesday, September 17th, 2019 at 12:42 pm

Copyright : Dmitrii Shironosov // 123 RFFee compression is putting pressure on those seeking to launch new target-date funds to be more innovative, prompting managers to consider more customization techniques, according to research from Cerulli Associates.

The challenge of fee compression is bolstering certain trends among target-date managers  including blending passive and active strategies and a push towards transitions from TDFs to managed accounts later in the plan member’s investment journey.

While active TDFs are still dominant over their passive counterparts, the margin is narrowing, the research found. Active market share over passive was 12 per cent in 2018, while the year before it was 18.1 per cent. The formation of TDFs that include both active and passive components is changing that dynamic. Cerulli’s report cited research that found assets in hybrid TDFs increased to US$152 billion in 2018 from US$126 billion in 2017.

“Assets invested in hybrid target-date funds are growing, and nearly half of target-date managers surveyed believe that hybrid target-date products will gather meaningful defined contribution plan assets during the next one to three years,” said Daniel Uquillas, a senior analyst at Cerulli, in a press release.

While it might be natural to assume this increased interest in hybridization is coming from plan sponsors currently using active strategies and seeking to include more passive methods to keep fees lower, there is equal interest from those currently using predominantly passive strategies, the research found. Those looking to shift from purely passive to a hybrid see an active component as a way to provide protection against market downside risk, it noted.

Target-date managers are also eyeing managed accounts, the research found. Of those Cerulli surveyed, close to half of respondents said current TDF offerings aren’t customized enough for retired members or those nearing retirement. Transitioning away from a strict target-date investment strategy as members get closer to retirement to a managed account could be a way to address that, the report found.

Half of target-date managers surveyed said they believe it’s highly likely a transition to managed accounts will be an attribute included in the creation of new TDF products, while 42 per cent said it was somewhat likely. Indeed, there are already target-date managers offering products that move the member out of a TDF model into a managed account as they age, the report noted.

“We recommend that target-date managers examine the potential demand for dynamic solutions, as many savers nearing retirement could benefit from customization,” said Uquillas.

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