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How Target Date Funds can help simplify the long-term savings journey for clients

18 June 2013

Fraser Donaldson - Insight Analyst - Wealth Management

There is an increasing number of outsourcing solutions available for undertaking long-term asset management, with Target Date Funds (TDFs) emerging as a viable option.

TDFs are designed to manage asset allocation over the long term in an increasingly conservative fashion towards the target date. The asset allocation typically starts with a ‘growth’ objective when far from the target date (for younger savers), progress to a ‘balanced’ objective (for mid-life savers) and culminate in a ‘cautious’ objective (for older savers).

This approach makes TDFs a very simple solution, which is a key part of their appeal to financial advisers. Instead of switching clients through a series of risk targeted funds as they grow older, a TDF has an asset allocation whose objectives evolve as the fund gets closer to its target date, providing a long-term savings solution through a single fund that can be allocated to groups of investors with shared objectives. TDFs can therefore deliver economies of scale without compromising the institutional expertise involved in designing and managing the asset allocation strategy.

Because of their simplistic methodology, there may be a temptation to think of all TDFs as taking a similar approach in terms of asset allocation. There can however be significant differences in the approach taken by fund managers such as assets being used, the level of risk being taken and different approaches to tactical and strategic asset allocation. This means there is still a key role to be played by advisers in selecting appropriate solutions for clients.

As this market grows it will become increasingly important for advisers to understand the structure and functionality of a TDF range as part of their due diligence process. Our guide to TDFs can help advisers understand the elements of due diligence that should be undertaken.

The publication describes in detail the due diligence considerations advisers should bear in mind when it comes to:

  • Understanding the TDF ‘glidepath’ – the expected change in asset allocation over time
  • Understanding who is managing the funds, and the experience and resource at their disposal
  • The cost of a fund or suite of funds over the long term and how this may impact on returns
  • The various approaches that may be taken towards asset allocation and management strategy

Our guide to TDFs also explores the suitability of TDFs as a pensions default fund and compares these funds to other, more established long-term asset management solutions in the market such as Lifestyle funds.