According to research firm Investor Economics (IE), Canadian life cycle investment funds, also known as target date funds, rose in assets under administration to $2,143.8 million as at September 2007, up from $1,360.4 million in December 2006. This represents 58% growth in the first nine months of the year, explains Iassen Tonkovski, senior analyst with IE. He added that Fidelity Investments’ ClearPath Retirement Portfolios are the market leader with 42% market share as of September 2007.
These figures are for the retail market. Figures were not available for the group market.
Investor Economics also says that the life cycle category totalled 0.5% of balanced fund and fund wrap assets in 2006, and that it expects the category to represent four to seven per cent by 2016, since it is fuelled by demographics.
Life cycle funds allow advisor and client to cover several decisions including retirement plan financing and asset allocation.
The success of this product has led a number of companies to jump on the bandwagon. BMO Investments launched BMO LifeStage Plus Funds in June and Franklin Templeton Investments launched LifeSmart portfolios a target date product for the group benefits market on Oct. 1.
Duane Green, vice-president, strategic alliances at Franklin Templeton, says industry sales into target date funds have been "very promising." He believes that the popularity of target date solutions among plan sponsors and plan members will increase due to increased awareness of employers’ fiduciary responsibilities for group plan members, and because of the Capital Accumulation Plan guidelines (CAP guidelines).
The guidelines set out best practices for employers with regard to ensuring that group plan members have the information and assistance they need to make educated investment decisions when saving for retirement.
Lifecycle funds provide pre-packaged investment solutions for plan members who are not actively following their investments, and particularly for those plan members who do not select an investment option for their group savings plan. For these plan participants, the employer must choose a default option. Whereas employers may have chosen balanced or money market funds for this option in the past, target date funds represent an excellent new option.
"This type of solution is very attractive for default options and for plan members that are not engaged in actively choosing their investments or who do not have the expertise to build their own portfolios," says Mr. Green. Using a target date solution "helps service providers and sponsors to offer all the best features of sophisticated portfolio management, while keeping the process straightforward and streamlined," Mr. Green adds.
Franklin Templeton is offering the funds through the insurance companies’ group benefits channel, with three target dates – 2020, 2030 and 2040, and a retirement portfolio, explains Mr. Green.
Employees of plan sponsors have three LifeSmart portfolios to choose from. The conservative portfolio currently has 50% equities and 50% fixed income. The moderate version has 60% equities and 40% fixed income, and the growth version has 70% equities and 30% fixed income.
Companies have varying distribution strategies. The Co-operators Group and Sun Life Financial, for example, sell life cycle funds solely through the group benefits channel. Fidelity sells through both the individual retail channel and the group benefits channel. RBC Asset Management sells its funds only as mutual funds, and Sun Life Financial sells them solely as segregated funds.There are also philosophical differences. The Ethical Funds Company, which provides the Ethical Advantage Series, has the only socially responsible investment target date funds in Canada.
The funds come with considerable pragmatic differences. As well as checking return, potential return, quality of fund management and other traditional criteria, the advisor faces decisions in matching characteristics such as actual target date, disposition of funds on maturity and attitudes towards issues such as longevity risk to client needs.
Companies vary in the characteristics of their funds, as they respond to their perceptions of these needs, their own investment philosophies and time horizons. That leaves the advisor to attempt to match those characteristics to client needs. For example, Russell Investments Canada has three LifePoints Target Date Portfolios: the 2010, 2020 and 2030, each with a different asset mix between equity fixed income holdings.Russell’s research suggests that their approach to maturity more directly addresses issues such as longevity risk than options such as 100% cash, explains
Dave Bullock, Russell’s managing director, distribution and marketing.
Russell provides the product solely as mutual funds in both the individual retail distribution and group benefits channels. "It’s our experience that one of the greatest risks that one has to consider in this day and age when one enters retirement in particular is what we call longevity risk. As that is sort of unpredictable, when you go to [other solutions], there is a much higher risk that you are going to outlive your money."
Fidelity offers a broad range of target dates with its ClearPath Retirement Portfolios, which has both mutual and segregated fund versions, sold in both the individual retail and group benefits channels. (It only sells group segregated funds.)
Fidelity constructs each portfolio based on research dealing with long-term market assumptions about returns, risk and factors such as what it sees as investor behaviour over time. "By that I mean the way that people invest cash flows … the way that people think about risk over time," says Andrew Dierdorf, portfolio manager at Fidelity Investments’ Boston headquarters, suggesting that onset of retirement makes investors very sensitive to losses. "Even if you take risk around the edges (outside of core holdings), it’s hard to mess up the core that you’ve built."RBC Asset Management takes a different approach to the maturity date, according to
Jonathan Hartman, vice-president, investment products at RBC Asset Management. On maturity the funds go to 100% cash, allowing for flexibility in use of proceeds such as helping offspring with education tuition bills. RBC believes that this makes them suitable for goals outside of retirement planning.
RBC provides the RBC Target 2010 Education Fund, RBC Target 2015 Education Fund, RBC Target 2020 Education Fund, and RBC Target 2025 Education Fund and sells them solely as mutual fund products. "The point of that is a specific goal date that is an end date goal where someone can say definitively ‘I’m targeting 2025 because that’s the year my child will attend university," he says, paraphrasing a typical investor. "The last thing you want is (to be) two years away from your son or daughter going to school and to hit the technology crash and half your savings are wiped out."
For investors needing absolute certainty, IA Clarington Target Funds provides a 100% maturity guarantee, consisting of the highest month-end net asset value per share figure.
IA Clarington Funds offers four portfolios in its Target Click series: 2010, 2015, 2020 and 2025. Each has three components, explains Eric Frape, senior vice-president, product and business development at IA Clarington which sells a mutual fund version through the individual retail sales channel.
These include cash and short term instruments, Government of Canada strip bonds and units in the ABN AMRO Global Equity Exposure Fund, which consists of 1/3 exposure to American equity market through the S&P 500 index, 1/3 exposure to the European market through European equity indices and 1/3 exposure to the Asian market through several Asian indices. ABN AMRO managers use futures contracts to maximize returns.
ABN AMRO managers will fulfill the guarantee by adjusting the asset mix by increasing the proportion of strip bonds to cover the guaranteed amounts. If, for example, the guaranteed NAVPS of the 2010 fund rose by $0.10, that would necessitate an increased allocation of trip bonds, he explains.
Aiming for investors looking for broader diversification, Sun Life plans to begin offering the
Barclays Global Investors LifePath Portfolios, as segregated funds in the group benefits channel. It currently provides the funds to one company plan sponsor and aimed to enrol others in November. The added diversification comes with assets not normally found in target date funds, commodities and real estate.
"Commodities and real estate offer opportunities for additional diversification," explains Ken Devlin, director, investment solutions, group retirement services at Sun Life. The series includes 2010, 2015, 2020, 2025, 2035 and 2040 funds, as well as a retirement fund. As currently planned, each target date fund will assume the asset mix of the retirement fund on maturity and exist for five years. Target date fund holdings will then be rolled into the retirement fund.
Mr. Bullock of Russell Investments believes the kind of growth lately experienced in Canada could continue, but may not reach the levels experienced in the United States due to factors such as differences in pension legislation, especially provisions in the Pension Protection Act of 2006 spurred sales.According to figures from a BMO press release citing figures from the Investment Company Institute (ICI) in the United States, the demand for life cycle funds in the U.S. has been particularly strong, with assets growing at a pace of 340% between 2004 and 2006, compared to the 40% growth rate of the rest of the fund industry.
"I would say that the Canadian marketplace is somewhat behind the U.S. in terms of growth in the target date world," he says. "A lot of the pension reform that’s taken place in the U.S. has driven a lot of … companies with pension plans into that space for a number of different reasons (including) to insure that employees of their firms have a similar experience in terms of the investment outcomes from their investments."
American pension regulations limit the types of investments that employers can make on behalf of employees and encourage employers to enrol employees automatically in retirement programs if they fail to sign up on their own. A popular interpretation of regulations suggests that merely selecting a money market fund as a default option does not relieve an employer of its fiduciary duty.
Similar pension reforms in Canada, if enacted, would increase growth in sales of these funds here, Mr. Bullock adds.