In fact, it’s the 'turning point', when the asset allocation shifts from being an accumulation strategy to a decumulation strategy. The target date can be matched to an investor's normal retirement date, their age e.g. 65, or simply the date that withdrawals are expected to commence.
So for a client who wants to take an income now, a target date fund 2016 to 2020 would be appropriate.
The advantages of a target date fund are 1) it offers a managed investment strategy within a single fund; 2) asset allocation changes are made consistently for all fundholders with a shared objective, and 3) the collectivised approach creates economies of scale in underlying fund and trading costs.
The disadvantages of a target date fund is that it is a “one size fits all” approach for a given investment strategy for a shared objective. The target date fund approach is best suited for non-advised and DIY investors, and for advisers who want a single fund solution for less engaged clients, where the investment strategy requires the withdrawal of capital to fund a retirement income.
Multi-asset income funds: Multi-asset income funds distribute capital and income to fund a “gross distribution yield”. They invest in income-generating equities, property and other asset classes in addition to bonds.
The advantages of a multi-asset income fund are 1) they are well-established with plenty to choose from; 2) they are straightforward to understand; and 3) they report a higher headline yield.
The disadvantages of a multi-asset income for decumulation investing is that 1) they are “one size fits all” with respect to the management of interest rate (duration) risk; 2) gross distribution yield includes capital so it’s not actually 'natural yield'; and 3) they necessarily have to seek out higher risk assets to be rewarded for higher yield.
Multi-asset income funds are also best suited for non-advised and DIY investors, and advisers who want a single fund solution for less engaged clients, where the decumulation strategy includes the investment strategy and does not require the withdrawal of capital to fund a retirement income (a yield only approach).
Target term fund: Target term funds only exist in the US. They are closed-ended funds with a stated maturity date where investors invest upfront, receive a monthly income distribution over the life of the investment and receive their original capital back at the end of the term; similar to a bond.
This intervening lock-in means that investment managers do not have to worry about redemptions, so can invest in less liquid assets to harvest an illiquidity premium from asset classes such as real estate, commercial debt and private debt, as well as more traditional liquid equities and bonds.
