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.