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Magazine Issues » Dec 2007-Jan 2008

LIFECYCLE FUNDS: For an easy life

Since the stock market crash, lifecycle funds have proven popular in the US. But can their success translate to Europe? Angelique Ruzicka investigates

07_12_lifecycle.jpgPrior to 2000 huge returns were not uncommon and US investors felt like professionals and that they couldn’t put a foot wrong with their investment choices. “They felt like they could pick any stock and everything was fine,” says Peggy Flynn, spokesperson for SEI in the US.

“But the three consecutive down years from 2000 to 2002 really scared investors when they looked at their account balances and found that they weren’t continuing to grow.”

With confidence in their abilities shot, investors looked for a solution and found lifecycle funds as one of the answers to their problems. Up until that stage, lifecycle funds, also known as target dated funds, had been living in the shadows of other funds in the US without receiving much attention. But that all changed when markets came crashing down. With confidence low, relieved investors left the asset allocation decisions up to managers. “They are now so popular as they take a lot of the decision making about asset allocation away from the participant. It’s a simple, full service solution.”

Indeed lifecycle funds are designed to mollycoddle investors by changing their risk profile over time from high risk, when they are young and able to bear that risk, to low risk as the investor approaches retirement. US investors have warmed to the concept and several industry commentators believe the funds will be successful in Europe as well.

Financial responsibility
“I think lifecycle funds could be as popular in Europe as they are in the States for several reasons. The secular trends that have driven their popularity here are also extant abroad.  Specifically, the demise of DC plans and the inability of governments to sustain longer and longer retirements for a growing number of citizens has pushed financial responsibility to individuals who, for the most part, are ill-equipped to make choices for themselves,” says Stephen Horan, head of private wealth and investor education of the CFA Institute. “The interim report on the Review of Generic Financial Advice (GFA) headed by Otto Thoresen and the FSA’s Retail Distribution Review (RDR) are responses to these trends. Their ultimate outcomes are not likely to be panaceas, however, leaving a role for products like lifecycle funds that ease the planning process for individuals.”

In the US, most of the major investment management firms have lifecycle offerings. The primary market share is, however, dominated by Fidelity, Vanguard and T. Rowe Price. New players include Alliance Bernstein, Pimco and JPMorgan. “Fidelity has about 60% of the market and Vanguard and T. Rowe Price have about 20% respectively.

However, all three players have been early entrants and there has been a lot of research by other providers that has come out with different products so the competition is pretty fierce and it’s only likely to increase,” says Flynn.

Fidelity’s Freedom funds have the upper hand in Europe too but this is likely to change according to Horan. “There is a good indication that these (US houses) might follow Fidelity’s lead in Europe. Moreover, Ameritrade has launched five new lifecycle ETFs, which gives Europeans access to these types of funds.”

The problem with catering to the European market is that the UK and the continent all have different investment philosophies. “In the UK the most popular investment option is a lifestyle fund which invests predominantly in equities until close to retirement where it switches over to bonds and cash,” says Ashish Kapur, SEI’s UK DC product specialist. “Europe is a bit more cautious in its investment approach. In the UK we have been using 100% equities in the growth portfolio, while in Europe it’s a more defensive portfolio, perhaps 60% equities and 40% bonds.  And they also have a lot of downside protection built into the product, especially in Germany because in a lot of those economies you have to provide a minimum return.”

ABN Amro is currently marketing its six lifecycle funds in the UK. They were launched in 2006 and are expected to mature between 2010 and 2035. The funds offer 100% capital guarantee. It has successfully launched similar funds in Canada, Europe, and other countries in Asia. “In Hong Kong we have an arrangement with a major bank distributor for their retirement plans and we’ve had success with Germany, the Netherlands, and Norway,” says John Townley, head of sales for UK insurance, ABN Amro.

But promoting this type of fund in the UK has not been simple. So far it has had a lukewarm response and ABN Amro is still on the hunt for a major distributor or platform to back the product. “We are now looking for a major insurance company or platform to get behind it,” says Townt that it takes time to get to it. In terms of sales, unless we have a launch with a major distributor it tends to be quite low in the first one or two years and then the product takes off and we are still in that low phase in the UK and that’s in line with our expectations.”

A more holistic approach
Target dated or lifecycle funds are one of the best ideas to come out of the industry in recent years as they cater directly for those investors who know little or nothing about how to invest for their retirement or wley. He went on to defend the fund’s slow takeoff in the UK. “We expect that when you bring new ideas to the markeho simply don’t have the time to manage funds. But Kapur criticises the way some of these funds are set up and calls  for more ingenuity. He argues that a manager of manager approach is needed to find the best of breed. “My view is that there is too much standardisation. What we need to do is think more holistically about what our clients are looking for. An investment bank and its membership are very different to a manufacturing fund and its membership. We also need to take tactical positioning in these funds. Investors don’t know what asset allocations they want and they want the fund manager to make the decision for them. They should think about what’s happening in the marketplace, rather than just having a blunt approach by saying ‘here is your asset allocation for the next 40 years’. We frankly need a lot more clever stuff to happen with lifecycle funds. With our manager of manager approach one thing we realise is that you can’t have a single manager who is good in all asset classes.”

© fe December 2007 / January 2008