Custom target-date funds growing in U.S.: survey

The U.S. customized target-date fund market grew to US$430 billion at the end of 2017, according to the Defined Contribution Institutional Investment Association.

The DCIIA’s inaugural survey on the market, which included data from 65 plans with a total of 673 different funds, found the majority of these funds are allocated to a mix of equities and fixed income.

Among the funds with a target date of 2060, the average equity allocation was 85 per cent and the average fixed income allocation was seven per cent, compared to income funds, with an average equity allocation of 28 per cent and 52 per cent for fixed income.

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“Publicly available information on institutional strategies in the defined contribution market, specifically [customized] TDFs, has been limited,” said Lew Minsky, chief executive officer and president of the DCIIA, in a press release. “With roughly half of the $2 trillion of target-date assets residing in institutional vehicles, DCIIA is uniquely positioned to gather the necessary data and provide information about these default investment options.”

The survey also found a modest but increasing allocation to inflation-sensitive asset classes, such as real estate, commodities, infrastructure and other real assets. Allocations of other diversifiers, like private equity and hedge funds, remain quite low, but they do remain consistently present across different funds.

Breaking asset classes down into public equities, U.S. large caps retained the top spot, appearing in 89 per cent of funds, followed by non-U.S. developed market equities (69 per cent) and emerging market stocks (66 per cent). Meanwhile, U.S. small-cap equities were in 49 per cent of funds, whereas strategies that included both small- and mid-cap U.S. stocks were in 29 per cent.

Read: More pension plans using target-date funds as default option

For fixed income, U.S. core bonds appeared in 94 per cent of funds, with short duration bonds the next most prevalent, at 49 per cent. High yield or high income bonds were less popular at 35 per cent, while cash was found in 29 per cent of funds. Emerging market and stable value bonds were both found in 20 per cent of funds.

In alternatives, treasury inflation protected securities were the most popular, showing up in 72 per cent of funds, followed by real estate (48 per cent) and commodities (38 per cent). Other real assets appeared in 23 per cent of funds, while further exposure to real estate through global real estate investment trusts showed up in 11 per cent. 

Further diversification wasn’t excessive, but bank loans and hedge funds were both found in six per cent of funds, while five per cent used global tactical asset allocation.

Read: Taking a risk-based approach to evaluating target-date funds