Huge Potential for Asia’s Target-Date Funds

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Huge potential for Asia’s Target-Date Funds

Still their infancy, assets are poised to take off as populations age

February 2019, Singapore. Beset with a greying population and pension funding issues, Asia has seen steady growth in target-date funds (TDFs) over the past few years, even though they remain in their infancy. According to Morningstar data, TDF assets under management (AUM) reached US$20.5 billion in 2018, a year-on-year growth of 5%, while those in the United States reached a whopping US$1 trillion in the same year.

U.S. TDF assets soared after regulations were passed in 2006 allowing participants of defined contribution plans who do not choose investment options to use such funds as default investment options. Similar developments in Asia—if they occur—could accelerate the growth of TDF assets in the region. However, some countries, particularly Korea and China, have already seen some regulatory changes that have spurred or could spur the growth of TDFs.

TDFs were first launched in Korea in 2011, but were not very popular until 2016, when assets shot up to US$57.9 million from US$4.1 million in 2015. AUM further skyrocketed to US$1.3 billion in 2018, according to Morningstar. The growth could be attributed to the Financial Services Commission’s move in 2015 to allow retirement pension schemes to invest up to 70% of their assets in high-risk assets, including equities, from 40% previously. The limit was further raised to 80% in September 2018. The moves give asset managers the flexibility to allocate more to equities for their TDFs.

Given the challenges in penetrating Korea’s retail market, Cerulli believes it is important for global asset managers to form partnerships with local firms if they intend to offer TDFs.

The Chinese government has launched several initiatives to grow its third-pillar pension space. In March last year, the China Securities Regulatory Commission finalized guidelines for pension target securities funds, allowing managers to launch pension target funds as either target-date or target-risk funds of funds. As of Dec. 28, 2018, the total number of CSRC-approved pension target funds stood at 40.

However, the sales of such funds have been slow due to last year’s market downturn, as well as the lack of awareness of retirement products, and investors’ trading mentality. Besides educating investors on retirement planning, asset managers will need to work closely with local distributors and build good track records to convince investors to invest in such funds.

Taiwan has seen relatively few pension reforms of late. However, the Securities Investment Trust and Consulting Association (SITCA) will implement the “Experimental Labor Pension Fund Member’s Choice Platform” this July, targeted at 10,000 people on online fund supermarket platform FundRich. If the two-year pilot is successful, it may accelerate demand for TDFs. Target maturity bond funds have seen a good take-up recently, with Invesco and Schroders being the frontrunners in this relatively new market. Both firms, together with Eastspring, have launched the only four onshore target maturity products in Taiwan that have raised more than NT$10 billion (US$324 million) during their launch periods.

With about 60% of the world’s population and its growing economies, the potential of Asia’s retirement markets is immense. Fund managers have much scope to raise and manage a chunk of these assets by educating retail investors, providing simple but appealing products, expanding distribution, and working with other industry players.

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