LIFE cycle funds seem to be almost a no-brainer for those who are saving for retirement and do not wish to shell out extra costs for financial advice.
Yet the response of Singaporeans to such funds has been lukewarm at best, even though it has been over five years since the first life cycle fund was launched here by UOB Asset Management.
Now Fidelity Investments has entered the scene with its offering of three life cycle funds, with a twist. One of the funds will pay an annual income of 4 per cent, designed for retirees who expect to begin to draw an income.
Clearly one of the biggest supporters of this investment structure - which has taken off in a big way in the US - is DBS. The bank has an exclusive arrangement with Fidelity to distribute its Live series of life cycle funds. Earlier this year, it also enlisted Schroders on an exclusive basis to offer Livesure 2025, a life cycle fund with capital protection. All the funds come under its Live Solutions programme.
Frances Chan, DBS senior vice-president, says: 'We felt this is something we wanted to do. We started talking to product providers to design funds that take care of individuals' retirement needs, especially those who are busy and need something simple that copes with the changes in life stages.'
Life cycle funds are generally balanced portfolios whose asset allocation is automatically adjusted to suit an investor's life stage. A young investor who invests in a fund that matures in 2020, for instance, may find a high initial equity allocation, which whittles down through the years. At maturity, the funds may be mainly in fixed income assets. UOB's GrowthPath funds were the the first in the market with the concept in 2002.
What distinguishes the newer funds such as Fidelity's and Schroders' is the flexibility to make allocations into alternative assets like commodities futures funds and property.
One of the benefits of the life cycle fund concept is to strip away emotions from the investment process. Too often, investors attempt to time markets, or invest in assets that simply catch their attention, which are often those that have done well in the recent past. In the US, an increasing number of retirement plan sponsors are making life cycle funds the default option. This is expected to usher in massive inflows into the funds.
To kick-start a regular savings habit, DBS is offering a 'RSP special' where those who invest monthly will pay zero sales charge. This is available for a 12-month period from May.
Ms Chan says: 'The market has been very challenging. Some clients had been having second thoughts about whether to invest or stay on the sidelines. But a market consolidation is a good time to start a long term investment plan . . . It's very important to get started and to start early. Then they have time working for them.'
The typical high costs of a regular savings plan may have been a damper to inflows into life cycle funds. Of course, the strong market returns of the last three to four years have also whetted the appetite for thematic funds. In comparison, balanced and life cycle funds seem staid and lacklustre.
Fidelity managing director Madeline Ho says that the firm is capping the Live funds' expense ratios at 1.95 per cent, which applies to CPF funds. The funds, however, are not included in the CPF scheme. 'We believe that for a long-term retirement plan, every cent counts.'
She adds: 'Over time, if the concept catches on, we can launch more (maturity) intervals.' Right now, investors have a choice of just two maturities - the Fidelity Live 2020 and Live 2030. In the US, Fidelity offers as many as 11 funds, maturing at five year intervals. The group manages a total of about US$77 billion in life cycle assets.
The third Live Today fund is structured to pay an annual coupon of 4 per cent. This is expected to be paid out of dividends, capital gains, and in a pinch, out of the fund's capital. 'One of the risks is withdrawal risk, when you draw on the fund too much and too quickly,' says Ms Ho.
There are less than a handful of life cycle fund providers in the market. UOB Asset Management's GrowthPath portfolios have total assets of about $327 million. Prudential's Adapt funds, which are partly allocated into Russell multimanager funds, appear to be the most successful so far in raising assets. The Adapt funds have a total of about $404 million.
An agency sales force may well make a more convincing case with its financial planning approach. Says an observer: 'Banks tend to have higher staff turnover which makes client servicing a bit difficult. In the insurance channel, advisers tend to have more continuity.'
Life cycle funds' long-term track record, where available, is respectable. UOB's GrowthPath 2040, for example, has a cumulative return of 53 per cent over five years, based on Lipper data.
This article was first published in The Business Times on Jun 4, 2008
