arrow_backReturn

Blending Active and Passive in TDFs

Target Date Funds (TDFs) are often categorized by being active or passive based on the makeup of the underlying holdings. Many issuers also offer blended or hybrid TDF series, which utilize both active and passive underlying holdings. However, the specific blend of active and passive holdings can be very different among issuers.

Avatar

By Clayton Fresk on August 31, 2020



Target Date Funds (TDFs) are often categorized by being active or passive based on the makeup of the underlying holdings.  Many issuers also offer blended or hybrid TDF series, which utilize both active and passive underlying holdings.  However, the specific blend of active and passive holdings can be very different among issuers.
 
The horizontal axis on the chart below isolates the percentage of equity within a TDF allocated to passive vehicles; the percentage of fixed income allocated to passive vehicles is isolated on the vertical axis.
 
(A quick note on fixed income:  Many series utilize cash and/or stable value investments within the fixed income allocation.  For purposes of this analysis, these vehicles were treated as Active investments).
 

Chart Source: Stadion
 
The first thing to look at are the upper right and lower left corners.  The upper right represents TDFs which are 100% passive in both equity and fixed income, which (by our analysis) include 21 separate series.  Conversely, the bottom left corner represents TDFs which are fully active, which includes 24 series.  So, in total these extremes represent 55 different series measured, or about 1/3 of the TDF universe.  This means approximately 2/3 have some mix of active and passive vehicles.
 
However, does that mean that 2/3 of the TDF universe can be reasonably considered Blend TDFs?  I’d argue not necessarily, as this classification is largely a matter of degrees. Many series will hold predominantly active or passive vehicles but may ‘switch’ for one particular subasset class.  A couple examples include:

  • A series being predominantly active, but using a passive S&P 500 vehicle to obtain some Large Cap exposure
  • A series being predominantly passive, but using an active vehicle for a specific exposure (i.e. Emerging Market Equities or REITs)
  • A series being predominantly passive, but using a stable value investment within fixed income (which touches on my earlier note)

Next, we’ll examine the boundaries of the chart, starting with the series on the bottom boundary.  These series use 100% active fixed income vehicles but mix active and passive within the equity allocation (which include 27 different series).  Here again, the way in which issuers blend active and passive in equity can vary.  Some use a prorata method for every sub-asset class (e.g.70% passive 30% active).  Others mix and match active and passive depending on the sub-asset class (e.g. allocating Large Cap and Developed International to passive vehicles, while allocating Small Cap and Emerging Market exposure to active vehicles).
 
Next, we’ll look at the right boundary, which are funds using 100% passive equity vehicles, but mix active and passive for fixed income (which includes 41 different series).  This side of the equation is a bit fuzzier depending on how cash and/or stable value vehicles are treated.  Many of these series’ sole active fixed income investment is a stable value fund, so reclassifying this exposure as passive would shift many of the dots up to the 100% passive upper right corner.
 
The rest of the dots scattered in the chart (53 in all) mix active and passive exposure in both equity and fixed income.  It’s observable there is no real pattern to how these exposures are mixed in terms of the percentage allocated.  These series also vary on the deployment of active and passive within equity and fixed income (i.e. the prorata or subasset class methods described above).
 
So, given that each series can have varying amounts of equity and fixed income depending on their glidepaths and vintages, how do these mixes affect the overall amount of passive or active held?  Here is the breakdown based on overall active and passive.
 

Grid Source: Stadion
 
If we use the threshold of having > 20% of the exposure in active or passive vehicles, about 42% of the series we could consider being a Blended series.  Here is a look at the chart from above with those series in red.
 
Chart Source: Stadion
 
We’re obviously not trying to say that blended TDFs are better or worse than their wholly active or passive counterparts, nor are we saying that one method of blending exposures is better than another.  This is just part of the education process when deciding which singular TDF series you may select.

Avatar

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.

Target Date FundTarget Date FundsTDFs
Avatar
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.


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.

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. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future.

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.

©2020 Stadion Money Management, LLC. All rights reserved. Stadion and the Stadion S are registered service marks of Stadion Money Management, LLC. StoryLine is a service mark of Stadion Money Management, LLC.
SMM-082020-581