Target-Date Managers Expect to Offer Strategic Beta

In a survey of target-date managers earlier this year, Cerulli Associates asked respondents what attributes were likely to be included in the next generation of target-date products.

Thirty-eight percent of asset managers predicted that use of strategic beta strategies would be the most likely feature, Cerulli reported.

Significantly fewer managers thought the following attributes were most likely to be included in future target-date products:

• Managed payout options, 27%
• Customization at the participant level, 23%
• Incorporation of an annuity allocation, 15%
• Incorporation of ESG principles into overall investment process, 12%

Strategic beta strategies, Cerulli noted, seek to deliver enhanced risk-adjusted returns relative to conventional market-cap-weighted passive allocations. These strategies are active in their objective of outperforming broad market indexes, but also passive in their systematic and rules-based implementation.

Target-date funds are long-term investment products, meant to be held through multiple market cycles. Benefits could accrue to asset managers that include strategic beta into their target-date series.

“In a target-date market dominated by low-cost, passive providers, strategic beta strategies are a way for active managers to compete with pure passive on cost while retaining some of the value-add tenets associated with active management,” Cerulli analyst Dan Cook said in a statement.

“For the larger target-date providers, strategic beta series can also serve as another option in their target-date product suite, giving plan sponsors the choice between passive, active and strategic beta.”

Recent trends in the defined-contribution markets argue for incorporating strategic beta into target-date products, Cerulli said.