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TDF Holdings: Active vs Passive (vs Both!)

It’s the holiday season once again, and for the kid in us, it’s time to look forward to unwrapping presents. It’s not unusual to be surprised by what’s inside the box. Sometimes it’s for the best but, unfortunately, sometimes it’s for the worse.

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By Clayton Fresk on December 23, 2019



It’s the holiday season once again, and for the kid in us, it’s time to look forward to unwrapping presents. It’s not unusual to be surprised by what’s inside the box. Sometimes it’s for the best but, unfortunately, sometimes it’s for the worse.

 

Although much less festive, one can also unwrap their Target Date Fund (TDF) to see what the underlying holdings look like. There are many ways to slice and dice an analysis of the underlying, but a simple overview can begin by determining whether the holdings are actively or passively managed. An actively managed fund within a TDF could allow for outperformance over an index (or passive) vehicle but could also risk underperformance. Furthermore, the fee paid for an actively managed underlying fund is most often higher, leading to a more expensive cost at the TDF level.

 

The choice between active and passive management isn’t necessarily black and white. Many issuers now offer a blended active/passive underlying holding. Some see this as best of both worlds: an opportunity for higher performance from the active funds but limited overall costs due to mixing in passive exposure.

 

The implementation of active/passive underlying holdings can also vary. Some issuers prefer to use passive exposure in certain asset classes (i.e. U.S. Large Cap Equities) and active exposure in other asset classes (i.e. Emerging Markets equity). Other issuers use a pro-rata allocation across all asset classes; for example, they may use active for 50% of the exposure and passive for 50% of the exposure within an asset class.

 

When looking at the blended funds in the industry, the amount of passive vs. active exposure can vary pretty much anywhere from 0% to 100%. For this analysis, we classify a Blend fund as one having between 20% and 80% passive exposure. Anything with passive exposure under 20% we classify as Active, as most of these cases there is only 1 passive fund in the underlying (usually U.S. Large Cap Equity —i.e. an S&P 500 Index fund), with the rest being active.

 


Chart Source: Morningstar

 

In terms of AUM, only about 8% reside in the blended funds. However, their popularity seems to be on the rise, as 18% of flows (YTD through 3Q19) are now going to these funds, decently more than the flow going to Active funds. The last column shows the asset weighted fees for these blended funds being roughly 0.20% lower than that of pure active funds (but obviously more expensive than pure passive funds).

 

The topic of fees is an ongoing, and ever-growing, fiduciary concern. Blended funds may allow for an opportunity to reduce costs without fully giving up on the potential benefits of active management. As we close out 2019 and approach 2020, it should be interesting to see how these trends continue, both in terms of flows to blended funds and, potentially, more issuers offering blended options.

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Author: Clayton Fresk

Clayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.

actively managedpassively managedTarget Date FundsTDF
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Written By:

Clayton Fresk

Clayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.


This document may contain certain information that constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology. No assurance, representation, or warranty is made by any person that any of Stadion’s assumptions, expectations, objectives, and/or goals will be achieved.

There is no guarantee of the future performance of any Stadion account. Material has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Results based on available universe of Target Date Fund Series, which includes registered mutual funds, and non-registered collective investment funds and insurance accounts. Collective investment funds and insurance accounts are only available for investment to qualified retirement plan assets such as 401(k) plans.

 

The commentary, analysis and opinions expressed are those of Stadion’s investment Team. The commentary, analysis and opinions referenced are as of the date of publication and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice. This is not a recommendation to buy or sell a particular security. The investment strategy or strategies discussed may not be suitable for all investors.

 

Investors must make their own decisions based on their specific investment objectives and financial circumstances. Stadion Money Management, LLC (“Stadion”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Stadion’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.

 

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