(Bloomberg News) Invesco Ltd. and Pacific Investment Management Co. are adding riskier assets and complicated strategies in target-date funds as they seek to gain ground on Fidelity Investments and Vanguard Group Inc. in this fast-growing segment of the U.S. retirement market.
While sellers promote the funds as a simple choice for people who don't want to pick their own investments and rebalance them, money managers are using inflation hedges and derivatives to bolster returns. That broadening doesn't address target-date funds' main issues: uneven returns, higher expenses and an inability to provide for individual retirement needs, said Bob Pozen, a senior lecturer of business administration at Harvard Business School and former chairman of MFS Investment Management.
Target-date mutual funds hold a mix of assets that become more conservative as employees age, which is why employers favor them when automatically enrolling workers in 401(k) retirement plans. Investments in the funds have swelled more than 380 percent since 2005 to about $343 billion as of September, according to the Investment Company Institute, a Washington- based trade group for the mutual-fund industry.
"Some people are losing sight of the risk-management goal by adding all these additional asset classes," said Jim Lauder, chief executive officer of Global Index Advisors, whose Atlanta- based firm runs about $14 billion in target-date fund assets for Wells Fargo & Co. and State Street Corp. "If you devastate their portfolios, inflation doesn't matter."
The funds' growth has attracted attention as studies, including those by the Government Accountability Office, have shown that Americans may outlive their savings. Less than 15 percent of Americans are very confident they'll have enough money to live comfortably in retirement, the Washington-based Employee Benefit Research Institute said in a study yesterday.
Invesco and Pimco are trying to attract assets by using more exotic strategies, which generally have higher fees, said Laura Lutton, an editorial director in the fund research group at Chicago-based Morningstar Inc.
Invesco uses exchange-traded futures and some swaps on futures to invest in commodities such as oil and soy meal, said Scott Wolle, chief investment officer of Invesco Global Asset Allocation. It also uses the derivatives to trade in six global equity markets and sovereign bond markets, including Australia, Japan and Germany. Atlanta-based Invesco started offering target-date funds in 2007 and has about $256 million in assets, Wolle said.
"There's complexity in the guts of how we manage the portfolio but there's a simple approach," he said. "We're trying to win by not losing."
Invesco's target-date fund for those retiring in 2020 returned about 9.8 percent last year with dividends reinvested, according to data compiled by Bloomberg. The average target-date fund lost about 1.6 percent last year, Morningstar data show, while the Standard & Poor's 500 Index gained about 2.1 percent with dividends reinvested.
Pimco's offerings saw a 398 percent jump in assets last year to reach $180 million, said John Miller, head of U.S. defined contribution and retirement for the firm. The Newport Beach, California-based company uses derivatives in its target- date funds to hedge against inflation, credit risks and currency dislocations by purchasing options contracts, futures or swaps, Miller said.