Default strategies becoming more diverse

Default funds are developing increasingly diverse approaches to equity exposure, length of glide path and tactical input, according to research from TDF Solutions.

The  research, which looks at both lifestyle funds and target date funds, highlights glide paths for default funds are utilising longer, shallower glide paths, with increased equity holdings at retirement becoming increasingly prevalent.

The research has been carried out on those funds on the Corporate Adviser Ultimate Default Fund long list that have published glide path. It identifies strategies ranging from the simplistic to the complex, depending on the extent to which asset allocation is dynamic or static, components of the fund are active or passive, and de-risking is linear or non-linear. Non-linear de-risking is described as being tactically driven de-risking rather than pre-determined de-risking.

Equity exposure 45 years before retirement varies from 100 per cent for the BlackRock LifePath Target Date Funds, compared to 42 per cent for the Standard Life Active Plus III Strategic Lifestyle Profile.

The JP Morgan SmartRetirement Target Date Funds, which have a 79 per cent equity exposure 45 years from retirement, start the move from equities earliest, around 30 years before retirement, with the Aviva Future Focus 2 Lifestage Approach, which has 74 per cent equity exposure at outset, starting its derisking 10 years before retirement. Both the JP Morgan and Birthstar Target Date Funds retain equity exposure at retirement date.

TDF Solutions is a research service provided by Elston Consulting, which has also developed the Birthstar Target Date Fund range contained in the report.

TDF Solutions director Gallia Grimston says: “This research shows just how much default funds differ in terms of design and therefore outcomes. With the SME market likely to be serviced by off the shelf strategies, this research aims to enable advisers to take a transparent view of the differences between the options available on the market and should work as a starting point for an important discussion on defaults.

“When you compare the funds in the long list for the Corporate Adviser Ultimate Default Fund this year with those shortlisted last year, it is clear that there is a trend towards longer, shallower glide paths. Whereas glide paths were until recently largely between five and 10 years, there is a growing trend towards as long as 15 years. We are also seeing a trend towards higher equity components at retirement, reflecting the increased influence of drawdown.

“We are also seeing a demarcation between static and dynamic asset allocation approaches, between passive and active management and between linear and non-linear strategies, which we expect to be reflected through higher charges for default funds with higher levels of fiduciary control.”