NestEgg series latest casualty of target-date fund shakeout

American Independence Financial Services LLC will liquidate its NestEgg target-date series in September, making it the fourth firm in three months to announce the folding of its target-date fund family.

In late July, New York-based American Independence filed its intent to liquidate NestEgg with the Securities and Exchange Commission, joining OppenheimerFunds, Columbia Management Investment Advisers LLC and Goldman Sachs Asset Management in deciding to drop target-date funds. The four firms' combined target-date fund assets of $937 million accounted for about 0.25% of the open-end mutual fund target-date market last year, according to Morningstar Inc.

Fund watchers say small scale, slow asset growth, poor performance, high fees, disappointed corporate parents and plan executives' cost-cutting efforts — or all of the above — led to the companies' decisions. They also say these liquidations illustrate how financial Darwinism is affecting the market even as target-date assets continue to grow.

“The timing may be coincidental, but it definitely suggests there's a shakeout phase going on,” said Josh Charlson, Chicago-based senior mutual fund analyst for Morningstar.

“Companies are evaluating whether they can continue — or whether they should cut their losses,” especially as cost pressures mount and asset growth isn't sufficient, he said.

According to Morningstar, at the end of 2011, the Oppenheimer Transition series had assets of $563 million; the Columbia Retirement Plus series had $177 million; the American Independence NestEgg series had $135 million; and the Goldman Sachs Retirement series had assets of $62 million.

Three firms control more than 75% of the target-date fund assets among open-end mutual funds, according to Morningstar. At the end of last year, Fidelity Investments' market share was 34.4%, Vanguard Group Inc. had 24.4% and T. Rowe Price Group Inc. had 16.6%.

With more than 40 other fund familiesfighting for the remaining 25% of the market, firms “have to ask, "Is it worth it?'” said Eddie Alfred, vice president for data and research at BrightScope Inc., San Diego.

“A few years ago, everyone was rushing to get in,” said Mr. Alfred, adding that more target-date funds could fold, especially if stock markets fall in the next 12 months. Even if the markets remain stable, there still could be liquidations by fund families with small market shares, said Mr. Alfred, whose firm conducts research about and provides ratings on defined contribution plans.

Target-date funds from defined contribution investment-only firms are the most vulnerable. Although some DCIO firms have healthy and highly rated funds, “the biggest thing (for fund viability) is having a record-keeping platform to distribute your target-date funds,” Mr. Alfred said.

“It's hard to compete for shelf space” without also offering record keeping and other services, agreed John Pileggi, managing partner at American Independence Financial Services. Like the other parents of the four liquidating target-date funds, American Independence is a DCIO.

“We looked at this (decision) for quite a while,” said Mr. Pileggi, whose firm has offered the NestEgg funds since 2006. To expand its target-date business, executives concluded the firm would have had to buy or build a record-keeping operation — and they decided it wasn't worth the expense.

OppenheimerFunds and Columbia Management introduced target-date funds in 2006. Goldman Sachs introduced its target-date series in 2007.

Multiple factors, including fund performance and portfolio quality, can play a role in the fate of funds. BrightScope's annual rating uses five criteria - fees, portfolio risk, performance, portfolio strategy and fund parent - to create an overall score: A, B, C, D or F. Last year, Goldman Sachs received an F; Columbia had a D; and Oppenheimer and American Independence each received a C.

Fees and the new fee-disclosure regulations from the Labor Department also will play a role in how target-date funds are viewed going forward.

A June Morningstar study said the weighted average target-date family expense ratio was 99 basis points in 2011 for open-ended mutual funds. The OppenheimerFunds' expense ratio of 155 basis points was the highest expense ratio among all target-date fund families. Goldman Sachs' expense ratio was 121 basis points. American Independence expense ratio had 82 basis points, and Columbia had 81 basis points.

All of the liquidation announcements were done with little fanfare via filings with the SEC of supplements to prospectuses.

American Independence's SEC filing on July 27 said the fund family's board of trustees voted to close the five NestEgg funds to new investments at the end of August and liquidate them in late September.

In an interview, Mr. Pileggi said his firm's target-date clients have defined contribution assets of $10 million or less, adding that each client has selected a successor fund family.

The NestEgg series represents about 10% of American Independence's total assets under management, half of which is in retirement accounts, Mr. Pileggi said.

New York-based OppenheimerFunds' decision to close its seven-fund Transition target-date series was part of a restructuring of the firm's investment options. Assets of the various target-date funds will be transferred to three balanced funds, according to supplements filed with the SEC in May and June.

OppenheimerFunds spokeswoman Kaitlyn Downing said the company would not comment beyond the SEC filing.

Columbia Management, Boston, issued a supplement to prospectuses of its eight target-date funds in mid-June announcing their upcoming liquidation. All funds in the Columbia Retirement Plus series, which were closed to new investors in late April, would be liquidated in late August, the supplement said.

“We continually review our lineup to ensure a focus on products that best serve our investors and the marketplace,” Charles Keller, a Columbia spokesman, wrote in an e-mail. “As a result of these efforts, we have decided to liquidate the funds.” He provided no details.

Goldman Sachs Trust Co. filed a July 2 SEC document saying it would close the six target-date funds in its Retirement Strategy series to new investments by current or prospective investors “subject to certain exceptions,” the SEC filing said.

New purchases were closed after July 27, “except that retirement plans ... that offer shares of a portfolio as an investment option as of that time and participants within such retirement plans may continue to purchase shares of that portfolio,” the filing said.

“Currently it is the intention of Goldman Sachs Asset Management LP ... to recommend to the board (of trustees) that the portfolios be liquidated later this year,” the filing said.

GSAM “remains committed to the defined contribution investment-only business and currently manages over $53 billion in retirement assets,” Tiffany Galvin, a company spokeswoman, wrote in an e-mail.

The May purchase of Dwight Asset Management, the stable value provider, “is one clear sign of this commitment that builds on (our) already strong fixed-income capabilities,” she added. “In the target-date realm, it means focusing our efforts on working with sponsors and their advisers in the area of custom target-date funds.”