Target-date CTFs Taking Hold in the DC Market

Target-date CTFs are taking hold due to their low fees, flexibility, and fiduciary structure and as a result, these products are poised for growth, Cerulli said in a press release. The latest findings of an ongoing survey of asset managers that captures CTF metrics and opinions reveal that asset managers are largely developing CTFs because of client demand, and they are most concerned about competition from their peers.      

Cerulli explains that the structure of CTFs gives them a particular advantage over mutual funds in target-date products.  Banks that act as trustee of a CTF by definition must act as fiduciaries for the fund’s assets; therefore, if pending regulations force investment managers to have greater fiduciary responsibility over target-date funds, CTFs will have an advantage over mutual funds as they are already providing this service, according to the press release.      

Another advantage CTFs have over mutual funds is the added flexibility to invest in alternative asset classes, such as direct real estate. CTFs could invest in non-correlated asset classes – making them a better single-fund solution for target-date investors.      

However, Cerulli notes that currently only a few target-date CTFs are using alternative investments, perhaps because the market is still young, or trustees are reluctant to take on additional fiduciary risk.      

While Cerulli believes target-date CTFs are poised for success, it is difficult to predict the future of these products without more information from CTF providers. CTFs have historically disclosed very little about their products to research firms, and Cerulli encourages firms to participate in industry surveys and databases to increase transparency in this industry.      

Other findings from Cerulli include:

• Product developers working to build a CTF business for legacy ’40-Act fund companies are poised to have a good year. In a recent Cerulli survey, 29% of respondents expect CTF asset growth in 2010 to increase by 20% or more and 53% believe it will increase by 10%-20%.
• Taking reduced funded status of corporate DB plans into consideration, Cerulli projects $108 billion in private DB contributions for 2010 – much of which is likely to flow into long-duration fixed-income investments.
• The market upheaval elicited new developments in the link between the asset management and insurance functions of the variable annuity, as hedging strategies expanded to the investment options that underlie the insurance guarantees. Cerulli contends that this translates into an opportunity for asset managers with domestic small-value investment expertise and for those who specialize in fixed income.