Target date funds: the $1.7tn US industry that's slipped under the radar in the UK
It could be a pub quiz question – name the multi-trillion dollar industry that’s practically non-existent in the UK.
While some may guess a niche area of engineering or technology, it’s doubtful many – if any – would say target date investment funds.
With around $1.7tn in the US, the largest market in the world for such funds, target funds launched to big fanfare on these shores a few years back, but have quietly whittled away with precious little assets left and even fewer options remaining for UK investors.
A REASONABLE IDEA
The idea of target funds seems reasonable enough. You pick a date you plan to retire or withdraw your investments, and pick a fund accordingly. All you need to tell the fund company is your age and when you want your money back.
The fund will be split between shares and bonds, usually with 80% in shares and 20% bonds when you begin the investment journey.
Say for example you plan to retire in 2040, such funds will rebalance automatically the closer you get to that date, the idea being you take a bit more risk for higher returns when you’re younger and less risk, in order to preserve the gains made in previous years, as you approach retirement or your target goal (for example sending the kids to university).
They are designed to effectively be a one-stop shop, and feature prominently in US employee retirement plans, called a 401(k).
Despite their soaring popularity in America, barely any people in the UK invest in target date funds.
TWO MAIN OPTIONS
For those that do, there are only two main options – Vanguard’s range of target date retirement funds from 2024 to 2060, and the Architas BirthStar range, the investments in which are managed by AllianceBernstein.
Both ranges have a very small amount of assets in them. The three funds in the Architas range have less than £3m of investors’ money combined.
The Vanguard range has significantly more in comparison, but the roughly £150m total is a lot less than the $800bn it has in its US equivalents.
Architas declined to comment on the BirthStar range, while AllianceBernstein was unavailable for comment at the time of publication.
Vanguard did talk to Shares, and its head of ETF product management Mark Fitzgerald believes the products will take off in the UK and Europe at some point in the not too distant future, particularly given the fact the removal of the requirement to buy an annuity in retirement gives savers more flexibility.
‘Let’s face it, most of us don’t have a bespoke savings plan,’ he adds. ‘So our target date funds are designed to be straightforward products that help you save for your retirement.
‘We’ll take on the strain of asset allocation. All you need to do is tell us your age and when you plan to retire and we’ll do the rest.’
FIDELITY EXITS THE MARKET
One of Vanguard’s big rivals, Fidelity, launched a range of target date funds in the UK a few years ago, but quietly withdrew from the market when it became clear the funds weren’t gathering much of investors’ money.
Shares understands that despite the low level of assets, Architas is sticking with its range as it believes the rationale for target date funds is sound and that they still have the potential to gather assets in future.
But Ryan Hughes, head of active portfolios at AJ Bell, says putting money into funds for a targeted date ‘just isn’t the way people here invest anymore’.
‘Before, you used to have your balanced pension fund and you would put everything in there,’ he explains. ‘But now, people invest in a risk-profiled way. That gliding mechanism [target date funds] have is covered by moving from adventurous to balanced to cautious.’
Hughes adds that target date funds ‘aren’t a bad idea’, but their low popularity combined with inherent issues in the way they’re set up means they’re not exactly primed for success on these shores.
He says, ‘If, for example ,you have a child and you put money into a fund for when they turn 18, and then you have another child three years later and want to do the same, that same [target date] fund won’t be appropriate.
‘The trouble is the fund groups have to keep launching new funds every few years.’
CLEAR REASONS FOR US POPULARITY
Fitzgerald is clear on the reasons why target date funds are so popular in the US but not over here at the moment.
He says, ‘In the UK, we are still in a marketplace where you have advisers who prefer to do the asset allocation for you, whereas in the US advisers are more advice-orientated, advising you on investment behaviours, tax planning, etc.’
Or in other words, in the US you’re given the advice but the asset allocation is up to you.
‘Plus, the social security net in the US is lower, so people are naturally more equity/investment-orientated,’ Fitzgerald adds. ‘They take a lot more ownership of their investments.’
As pension freedoms give UK retirees more flexibility than ever before, Vanguard is banking on an increasing number of people taking ownership of their investments in the UK too.