Lifecycle Investing with Target Date Funds

Posted: 9 Jun 2015

Date Written: June 25, 2012

Abstract

Consumer demand and regulatory changes in the UK, is driving growth of innovative solutions that are easier to use, simpler to understand, offer good value for money, and create better customer outcomes. A key tool in this growing sector are asset allocation funds such as Target Date Funds (TDFs), which are being used as a single fund whose objectives can change over the investor’s lifecycle as time goes on. Target Date Funds are used as a default investment option for workplace pensions by providers including the government’s own scheme (NEST), and are gaining renewed interest in the retail funds sector.

Within the context of asset allocation funds, Target Date Funds differ from risk profiled or target risk funds because they also incorporate the investment time horizon within the asset allocation strategy. The strategy within each fund typically becomes more conservative over time, on approach to and after the Target Date, which is when withdrawals are expected to commence. This is to match changing objectives within the investor’s lifecycle that shifts from a saving strategy (accumulation) to a spending strategy (decumulation), with the turning point at the target date.

In this research paper we outline the basic principles of TDFs design and management. We also provide insights into how they help deliver good customer outcomes and a simplified and intuitive approach to investing; both from investment theory and behavioural science perspectives.

Keywords: Target date funds, simplified investing, time diversification, investment horizons, asset allocation

JEL Classification: G02, G11, G18, G23

Suggested Citation

Cobbe, Henry, Lifecycle Investing with Target Date Funds (June 25, 2012). Available at SSRN: https://ssrn.com/abstract=2616133

Henry Cobbe (Contact Author)

Elston Consulting Ltd. ( email )

20-22 BEDFORD ROW
LONDON, WC1R 4JS
United Kingdom
+442070428044 (Phone)

HOME PAGE: http://www.elstonconsulting.co.uk

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