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'Target Date Funds' will be the next investment phenomena, says Russell
New research shows Target Date Funds already surpassing static diversified funds in the US
SYDNEY, 3 April 2006 — Russell Investment Group, the global leader in multi-manager investing, believes 'target date funds' will become a significant investment phenomena in Australia over the coming decade, as Australian investors and super fund members seek simplified investment choices.
The claim comes in the wake of new US research by independent group Lipper, which shows that during the last four years, more than 50 per cent of funds flow into US 'lifestyle' funds (ie funds with risk-based asset allocations ranging from conservative to aggressive) have gone into target date funds — with 2005 alone showing target date funds receiving over 80 per cent of new inflows.
US assets in lifestyle funds now exceed US$100 billion with net cash flows running at around US$24 billion per annum. The target date fund proportion of these funds has already surpasses the size of US static allocation diversified funds.
In Australia the majority of assets in employer financed defined contribution superannuation funds, the majority of which are invested in super funds' 'default' option — typically a 'growth' or 'balanced' fund. According to Heather Dawson, Russell's managing director, retirement services, this suggests the growth potential for target date funds here is significant.
"Even a 10 per cent share of the Australian diversified fund market — quite feasible when compared with the 60 per cent in the US — would represent over $30 billion in assets. We believe the phenomenal growth in US target date funds is likely to be replicated in Australia, as Australian superannuation funds and master trusts respond to individuals' actual investment behaviour in the new choice environment," she added.
Target date funds invest in a mixture of growth and income assets and automatically alter their asset allocation over time, as you near retirement. The 'target date' for the fund is the year you plan to retire. Investors select a 'target date' and the portfolio automatically becomes more conservative as they approach retirement.
Today, more than one in three US retirement plans offer some form of 'lifestyle' fund. Russell launched Australia's first target date fund — the Russell LifePoints Target Date Portfolios — late last year and is already experiencing strong interest from superannuation funds as well as members within Russell's SuperSolution MasterTrust.
Ms Dawson said target date funds challenged the status quo of traditional diversified funds in Australia, and would take some time to gather momentum. "However we find the investor behaviour story in the US absolutely compelling, and a beacon for the Australian market," she said. "We have an opportunity to not make the same mistakes the US has made, where people had a huge amount of investment choice but collectively made some very poor investment decisions."
Ms Dawson said the American experience had shown that too much choice had not served the best interests of investors, and that people were now turning in droves to "simplified investment solutions that offer embedded advice on all the key decisions, such as what managers to choose and what asset allocation to set."
"The US has provided us with a real insight into actual investor behaviour — which is highly relevant to the Australian market in terms of developing solutions that are going to serve the best interests of investors. Research has shown that in Australia the majority of people don't seek financial advice; they don't take time to evaluate their risk profile and choose an appropriate asset allocation; and, even if they do, they rarely reassess it. Target date funds automatically alter their asset allocation over time — and that's why they have become one of the fastest growing investment phenomenas around the world."
While simple in concept, underlying the Russell LifePoints Target Date Portfolios are highly sophisticated investment vehicles, drawing on Russell's firepower as the world's largest multi-manager and leveraging Russell's 494 strong global investment manager research team. All the Russell Funds in which the Russell LifePoints Target Date Portfolios invest are managed by Russell's hand-picked investment managers from around the world, which are carefully combined for their complementary investment style and monitored daily. Funds are expertly rebalanced to ensure minimal 'leakage'.
Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 ("RIM"). This document provides general information only. It has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. RIM is the issuer of units in the Russell Pooled Superannuation Trust ("Russell PST"). An invitation to apply for an investment in the Russell LifePoint 'Target Date' Portfolios of the Russell PST is made by RIM in a Product Disclosure Statement ("PDS") dated 1 October 2005.. Any potential investor should consider the PDS in deciding whether to acquire, or to continue to hold, an investment in the Russell LifePoint 'Target Date' Portfolios. The PDS is currently available from Russell at Level 17 19-29 Martin Place, Sydney or by phoning (02) 9229 5111. RIM or its associates, officers or employees may have interests in the financial products referred to in this information by acting in various roles including, broker or adviser, and may receive fees, brokerage or commissions for acting in these capacities. In addition, RIM or its associates, officers or employees may buy or sell the financial products as principal or agent. You may contact RIM on (02) 9229 5111.
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