Anxious to address the shifting investment needs of aging investors, fund and insurance companies have brought life-cycle funds to the table, with Fidelity Investments Canada Ltd. the latest to add to its product lineup. Given the experience with similar funds in the U.S., advisors could have big sellers on their hands.

“It’s been a huge segment [in the U.S.].
Life-cycle funds have been vacuuming up dollars in certain distribution channels,” says Cynthia Enns, a partner at Vancouver-based Credo Consulting Inc.,
referring to the funds’ growing popularity in defined-contribution plans.

In general, these funds offer asset mixes that are suitable for various stages in a client’s life. They are designed to meet the perceived investor demand for simplicity and security. The funds come in two versions.
The so-called “target allocation” funds have static asset allocations, while the “target date” funds shift asset mixes over time so the portfolios become more conservative as the funds approach their target dates.

First to introduce life-cycle funds to the Canadian retail market was Toronto-based ClaringtonFunds Inc. Last February, it launched the Target Click series of four funds, each of which has a fixed maturity date (2010, 2015, 2020 and 2025). Backed by its partner, ABN Amro Asset Management Canada Ltd., Clarington has the distinction of offering a capital-protection guarantee that enables investors to lock in the highest month-end value that each fund achieves.
To date, Clarington has attracted more than $70 million in assets, most of which are invested in the 2015 fund. “We expect this to attract a significant amount of assets. It could become one of our biggest products,”
says Eric Frape, Clarington’s vice president of product management in Toronto.

Since Clarington launched its funds, a slew of other firms have jumped on the bandwagon. Sun Life Financial Inc.
introduced its Milestone Funds, aimed at the employee-sponsored group retirement and savings plans. Bank of Nova Scotia’s Toronto-based subsidiary, Scotia Securities Inc., launched its eight Vision Funds, which are promoted as investment solutions aimed at meeting needs for retirement, education or a vacation home. The Vision funds’ target dates range from 2010 to 2030.

In July, Toronto-based Russell Investment Group introduced three LifePoints Target Date Portfolios that mature in 2010, 2020 and 2030, as well as four target-allocation portfolios that match specific risk tolerances.
At the same time, Vancouver-based Ethical Funds Co. launched five Ethical Advantage Funds, with target dates ranging from 2010 to 2040.

The latest to join the fray is Toronto-based Fidelity. In November, it introduced ClearPath Retirement Portfolios, a series of nine funds with target dates stretching from 2005 to 2045. The firm is leveraging off the success of the ClearPath series in the Canadian defined-contribution market, in which it has attracted $200 million in assets.
It is also relying on the expertise of its parent, Boston-based Fidelity Investments, which is the biggest single player in the U.S.
life-cycle market with more than US$40 billion in assets.

In Canada, “there has been pent up demand,” says Wilfred Vos, Fidelity Canada’s vice president of product development. “People appreciate that in order to achieve investment success, they have to do things that are a little complicated. But they don’t want complexity; they want simplicity. This is an excellent one-stop solution,” he says. Clients simply decide when they want to retire and let Fidelity handle the complexity of creating an asset mix that maximizes the probability of having enough to retire, without incurring undue risk.

But some fund analysts are not enthusiastic about the products.

“They have some appeal, but they don’t allow for much customization,” says Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates Inc. “It sounds as if they are customized because they are tailored to specific time frames, but time horizon is only one of many factors in designing a customized asset mix. It’s not the factor. These products fail to provide the customization that a lot of clients need.”

Moreover, while life-cycle funds may be appropriate for some clients, the problem is that clients may already have other funds. “I am not sure what it will accomplish if one piece is geared [toward] a moving asset mix,” he says. “I am not sure it will create much value.”

Hallett concedes that life-cycle funds could have a place for clients with assets of less than $50,000, and that the funds could benefit unitholders in the same way that a fund of funds would. “It could be a convenient choice for smaller clients because these may be the only funds they will have for a while,” he says.

@page_break@But based on the U.S. experience, Enns expects the niche to grow appreciably. Since 1996, the U.S. market for target-date funds has grown to US$50 billion, with another US$130 billion in so-called “target risk” funds (similar to target-allocation funds in Canada), which have static asset mixes.
Target-date funds grew at a 70% compounded annual rate between late 2002 and June 2005, she adds, vs 13% for all long-term assets in the same period.

Enns is not certain which distribution channel in Canada will be the most receptive to the products. “Some advisors have been moving in this direction, and are using packaged products in a holistic way, and are not product-driven,” she says. “This allows them to take a broader approach, and not just focus on a particular fund.”

She notes that life-cycle funds are gaining ground among advisors in the U.S. “They don’t mind using a ‘plug and play’
investment product if they value its role in estate planning and tax planning. The question is: how does the advisor view his or her role?”

Enns also expects the format will appeal to smaller investors in the direct sales channel, such as banks, because it is easy to understand — and an easy sell: “I expect there will be success in this format in the over-the-counter branch; that’s where I see this having a role. It’s not so much about advisor-assisted planning, but about an easy-to-understand product that can be delivered across the counter. Meanwhile, of course, professional management of the assets is maintained at the product level.”

That, indeed, is the approach taken by Scotiabank. “The Vision funds are a way of dealing with a complicated subject, and it works easily for investors and advisors alike,” says Ian Filderman, director of mutual funds at Toronto-based Scotiabank Wealth Management. “It is a way of dealing with issues such as time horizons, risk, asset allocation and how to manage it over time. It puts it in one simple package that is easy to explain and understand.”

To date, Vision funds have attracted about $170 million in assets, but the bank is expecting the series to become a “cornerstone” product.

“In some ways, it is the ultimate ‘set it and forget it’ product,” Filderman adds, noting Scotia Cassels Investment Counsel Ltd. is consulting with Chicago-based Ibbotson Associates Inc.</b to create the asset mixes. “In part, its simplicity appeals to advisors, but it also offers sophistication behind the scenes. The marriage of the two is the attraction. These funds are built with very sophisticated concepts and put into one package.”

Filderman is aware of criticism that the funds focus on meeting target dates and pay little heed to individual risk tolerance. He points to the fact that the Vision series (built on nine asset classes) comes in two versions, aggressive and conservative.

“We’ve said that time horizon is a key element in risk management, but so is the individual’s appetite for risk and ability to stand volatility over time,” he says. Equity weightings tend to be 5%-10% larger in the aggressive versions than in the conservative ones.

It’s all about investor discipline, says David Bullock, director of private client programs at Russell Investment Group. “These funds will help clients stay the course more effectively than clients who tend to chase the fund of the month.”

He notes that investors tend to be impatient and typically stay less than two years in a fund, behaviour that is clearly not in investors’ best interest. “The beauty of target-date funds is that, if they are sold appropriately, they will help clients focus on the long term. It is a single-decision product and helps maintain the discipline that clients need to meet their goals,” says Bullock.

“Some clients panic and want to move out whenever there is a market hiccup. By focusing on a specific date, this will assist advisors in developing financial plans for their clients and help them stay the course,” he says.

Although Bullock’s firm has only begun to roll out its life-cycle program, over the next 12 months it expects to attract between $500 million and $1 billion in assets,
cumulatively, in the target-date version of LifePoints Portfolios and the target-allocation version.

Clarington’s Frape contends that the firm’s TargetClick program is a vehicle that will build an advisor’s business because it takes a client-oriented approach.

“Research in the U.S. shows that
relationship-oriented advisors tend to be more successful in growing their businesses than those who are investment-focused,” he says. Ideally, life-cycle funds would be the foundation of a client’s portfolio, or that portion which he or she cannot afford to lose.

And this portion, Frape notes, should also meet key criteria such as capital protection, growth potential, liquidity and time horizon.

“When you look at the criteria for that foundation, there are very few one-stop solutions out there,” says Frape. “Our program will help advisors really focus on the relationship side, and less on the investment side.” IE