Not all target date funds are the same so advisers should carry out extensive due diligence before recommending one as a default fund, according to a new report from Defaqto.
The report into the fledgling TDF market says advisers should be aware of managers’ different beliefs and approaches to delivering an optimal investment outcome for a given target date. Two funds with the same target date may have very different asset allocations and therefore different levels of risk and return characteristics, says the research consultancy.
Defaqto says advisers considering TDFs should review the strategic asset allocation model – or glidepath – to understand what the asset allocation looks likes today for a given fund and what it is expected to look like at the target date. Advisers should demand to see a TDF managers’ glidepath diagram that illustrates the expected asset allocation over time before, at and after the given target date.
Advisers also need to understand the component funds that are used to deliver the asset allocation strategy and should establish whether these are held physically or through swaps, says the report, which puts the market at around £4bn assets under management to date, half of which is held by Axa Investment Managers.
Defaqto insight analyst for funds Fraser Donaldson says: “TDFs have been designed to remove a lot of the decision-making elements from long-term savings. There are differences in management approach however and it is therefore likely that there will also be differences in outcomes.
“As with any other funds, we see differences in the assets being used, different levels of risk being taken and different approaches to tactical and strategic asset allocation, so there is still a role to be played by the adviser in identifying the most appropriate solution.
“Assessment of the different approaches will increase the probability of selecting the right TDF, or suite of TDFs, for the client.”
BirthStar director Henry Cobbe says: “We expect assets in TDFs to increase as corporate advisers take a fresh look at default strategies, and as Nest gains momentum.”