Why an asset manager’s winning retirement funds couldn't win sponsors over

For many plan sponsors and consultants, the returns haven't justified the investment strategy

Why an asset manager’s winning retirement funds couldn't win sponsors over

Nothing ventured, nothing gained, as the old maxim goes. But as the case of one firm’s signature funds illustrates, winning performance might not be enough to attract buyers if it comes with too much risk.

The mutual funds at US-based Fidelity’s flagship retirement franchise have outdone at least 85% of their competitors over the past three years, reported Reuters Canada. Despite that, retirement-plan sponsors have been pulling money out of the firm’s funds and putting them into rivals’ target-date funds.

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The movement is motivated in part by unease with the firm’s exposure to stocks, including ones from fickle emerging markets, which has increased since a strategy overhaul that went into effect in 2014. And rather than sticking to its long-held approach of sticking to pre-set asset allocations in target-date funds, portfolio managers at the firm now move assets in an effort to time market shifts.

“Such changes have worked well in the second-longest running bull market in US history, but they expose investors to bigger losses if the funds’ increasingly volatile assets head south,” Reuters said.

While they have not gone as far as Fidelity, others are on the same path. According to Ron Surz, president of research firm Target Date Solutions, many target-date fund managers are juicing returns by spiking porfolios with riskier investments. This has made the sector even riskier today than it was during the 2008 financial crisis, he told Reuters.

“The Freedom Funds are a lifetime savings solution … [that] deliver exceptional performance for shareholders taking appropriate risks,” said Fidelity spokesperson Vincent Loporchio. Because of the later age of retirement and longer lifespans of American savers, he claimed, American savers have more time to recover losses and are able to tolerate more risk.

Concerns have been raised about the funds’ performance during a recent global market selloff; the Freedom 2020 Fund and the 2040 Fund lagged 81% and 87% of their respective rivals between Jan. 26 and Feb. 8, according to Morningstar. In response, Loporchio said the short-term swings are not reflective of the long-term performance that Fidelity’s retirement savers will see.

“When Fidelity products yield disappointing returns, we work relentlessly to improve them,” he said.

With US$224 billion from approximately 6.2 million Americans, the Freedom Funds make up around 10% of the firm’s assets under management and generate fee revenues that approach US$1 billion yearly.

But they are rapidly losing ground to rivals in the target-date fund business; from a record of 43% at the end of 2008, their share of overall target-date fund assets has plunged to 21%, according to data from Morningstar. Fidelity was also the only one among the top five US target-date providers to have net withdrawals in 2016 and 2017; over that period, the target-date industry saw US$129 billion in net deposits.


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