In a crowded target-date fund market, some of the newest fund entrants are emphasizing a blend of active and passive investments, trying to distinguish themselves from competitors offering an all-passive or all-active approach.
The reasons for blending strategies vary. In some cases, for example, providers of existing target-date series added another option to attract new defined contribution clients or provide a choice for current target-date fund clients.
In other cases, providers of blend target-date funds are marketing their off-the-shelf offerings as an option to DC plans that aren't big enough to offer, can't afford or don't want to pursue a custom target-date portfolio.
“Large DC plans use custom target-date funds to be flexible,” said Richard Fulford, executive vice president and head of U.S. retirement at Pacific Investment Management Co. LLC, Newport Beach, Calif., which has worked with clients to develop custom target-date funds. “We want to bring that same capability in prepackaged form to all plans.”
In May, PIMCO introduced its RealPath Blend target-date series, which features an average 60% equity/40% fixed-income ratio. All of the equity is passively managed by Vanguard Group Inc., and all of the fixed income is actively managed by PIMCO.
For Principal Financial Group, the decision to introduce a mutual-fund target-date series using a blend strategy — the Principal LifeTime Hybrid Series — in 2014 was based on plan executives' and participants' concerns about risk and fees emerging from the economic crisis of 2008, said Jeffrey Tyler, lead portfolio manager for Des Moines, Iowa-based Principal's target-date series.
Principal also has offered the actively managed mutual fund-based Principal LifeTime series since 2001.
Blend-strategy funds aren't new; the oldest one listed in Morningstar Inc.'s database was launched in 1996. But they still are significantly outnumbered by actively managed target-date funds analyzed by Morningstar, and there are slightly more blend funds than passive funds.
(The Chicago-based investment research firm defines an active target-date fund as one in which at least 80% of the underlying assets are actively managed; a passive fund has at least 80% of the underlying assets in index investments; and a blend is anything else. Morningstar doesn't track custom or collective investment trust target-date portfolios. Its research covers target-date funds used in retirement accounts and taxable accounts.)
Recently, several new blend-style target-date funds have entered the market. Product providers are trying to capitalize on the continued popularity of target-date funds in DC plans, especially as the adoption of such funds is propelled by their role as qualified default investment alternatives.
Still, all new target-date funds face challenges. The mutual fund-based target-date market remains dominated by three firms — Fidelity Investments, Vanguard and T. Rowe Price Group Inc. They had a combined 71% of the $703.4 billion in assets in 2014, according to Morningstar.
The struggle for new target-date funds to sustain growth is compounded by the fact that there is little long-term difference in performance among passive, active and blended target-date funds.
A recent Morningstar report showed that for the three years ended Dec. 31, the annualized total return, net of fees, was 11.7% for passive funds, 11.6% for active funds and 11.6% for blend funds. For the five years ended Dec. 31, the annualized return, net of fees, was 9.1% for passive, 9.1% for active and 9.3% for blend funds.