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February 08, 2019 at 03:50 PM
Passive strategies have largely dominated target date funds for the past few years.
In 2017, passive TDFs captured an eye-popping 95% of net TDF flows, according to Morningstar Target Date Research.
However, new research from PGIM Investments looks at why a shift to hybrid TDF strategies may be on the horizon. Hybrid TDFs, which combine active and passive management, emulate a more institutional approach to managing multi-asset class portfolios.
Passive exposures help keep participant expenses low, while active exposures provide participants the potential for added incremental returns and the mitigation of key investment risks, according to the report.
One reason hybrid approaches may be on the rise now is that active exposures can help mitigate market declines and interest rate volatility
“Market environments change and the performance tailwinds for passive investments are unlikely to persist indefinitely,” the report states. “In fact, as interest rates rise and market volatility returns, more asset classes have edged closer to (if not actually entered) bear market territory.”
Because of this, active management, in both equities and fixed income, may be poised for a period of outperformance, according to the report.
Compared to active TDFs, though, hybrid TDFs are normally less expensive to participants. According to the report, hybrid TDFs also – depending on the level of participant investment – often reduce overall participant costs for the entire plan.
