Vanguard has unveiled a range of low-cost, diversified single-fund solutions to aid investors in reaching their retirement goals. The launches come as the company attempts to diversify its product offering in the UK.
The Target Retirement Funds (TRFs) take control of investors’ retirement savings and, depending on the retirement date of the individual, one of nine TRF offerings is picked. The TRFs automatically alter the asset mix as the investor’s circumstances change throughout their careers and as they enter the retirement phase. The asset mix alterations vary considerably. A high equity allocation of up to 80 per cent is in place for younger investors, below 43, but this is reduced to 30 per cent in late retirement, after 75, giving way to less risky securities including bonds and short-term reserves.
The TRF offerings can be included in a self-invested personal pension (Sipp), Individual Savings Account (Isa) as well as the new Lifetime Isas, which come into play in 2017.
Recent research conducted by Vanguard showed that investors often have a lack of time or inclination for retirement planning. The TRF offerings aim to address these challenges by providing straightforward fund solutions, primarily based on investment best practice as well as being managed by Vanguard’s investment professionals. This could make life easier for investors who face more options as a result of the pension freedoms.
The ongoing charges figure for the nine product offerings is 0.24 per cent across the board. Although the initial investment varies by platform, for most it is either an initial £1,000 investment, or monthly instalments of £50.
The TRFs are currently available on Ascentric, Raymond James, Novia, Zurich, FNZ, Alliance Trust Savings, Hargreaves Lansdown, Fidelity Personal Investing and Aviva Investment account. There are plans to add more platforms in the near future.
Comment
The TRFs main appeal is in their automatic asset mix management, mirroring lifestyling by taking greater risks in funds where the retirement date is set later into the future. The Target Retirement 2015 fund is subsequently the most conservative, with the highest proportion of bond holdings, while the 2055 fund is the most aggressive, with the highest weighting in equities.
The 2045 fund, which has been on offer in the US since 2003, has underperformed its benchmark this year to date. However, longer term performance has been more positive, with the five year average return figure standing at 5.9 per cent. In November 2015, the 2045 fund was awarded a four star rating by Morningstar for the past 3 to 5 years and a 3 star rating for the past 10 years.
Returns like this will be welcome in the UK market, where ROI figures remain meagre, especially wit the reduced cost and relatively low ongoing charges.
The TRFs are not without critics however. Due to the homogenous asset allocation for each TRF, some investors are bound to be dissatisfied. After all, risk appetites will differ, and not all investors will want the same asset allocation even if they retire in the same year.
However, as a result of the funds’ large allocation to taxable bonds, investors with portfolios situated in a tax-advantaged account stand to benefit most. The TRFs may also be most appropriate for investors with totally taxable portfolios if there is a high probability of a low tax bracket for the envisaged holding period - usually a lifetime.
