Target-Date Blend Funds Getting More Popular

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Morningstar recently published its annual target-date landscape report for 2021, and blended strategies are gaining traction. Joining me today to talk about what these strategies are, and to talk a little bit about two of our favorites, is Megan Pacholok. Megan is the co-author of this study, and she is also an analyst with Morningstar's multi-asset team. Hi, Megan. Thanks for being here today.

Megan Pacholok: Hi, Susan. Thanks for having me.

Dziubinski: So, let's start out with the basic definition. What are these blended strategies?

Pacholok: So, a blend strategy is really one that utilizes both passive and active underlying funds together. There is no hard rule as to how to blend them together or how much to use. But we've categorized those that have between 30% and 70% active exposure, while the remaining in passive exposure, to be considered blend.

Dziubinski: Now, why are some asset managers pursuing blended strategies with their target date vehicles?

Pacholok: It's not uncommon for a target-date provider to offer more than one series. Historically, you have seen them offer an active-only option or an index-only option. Blend really allows them to have a middle-of-the-road option that stays competitive on fees while also not giving up all of their active manager exposure.

Dziubinski: So, what do investors think of these blended strategies? Are they taking in more assets or getting more traction than, say, the all-active approach or the all-index approaches?

Pacholok: We've actually seen them gain in popularity in more recent years, and we think it's coming from the active-only space. For instance, if we take 2020, three of the top 10 target-date funds that experienced inflows were blend strategies, whereas only one was an active-only option.

Dziubinski: So, Megan, what are the benefits to investors of these blended approaches?

Pacholok: So, there are two major benefits to a blend approach, the first being fees. The cost is a crucial consideration when it comes to selecting a target-date fund. And having a blend approach--since they do incorporate additional passive investments compared to those active-onlys--it gives them a bit of a price advantage. The second one being it hangs on to some exposure to active managers, so they have a higher potential of outperforming than the index-only option.

Dziubinski: Now, there are a couple of target-date series that pursue these blended approaches that we award a Gold rating to, the first being JPMorgan SmartRetirement Blend. Tell us a little bit about those vehicles in particular.

Pacholok: So, JPMorgan SmartRetirement plan was actually one of the first blend strategies to come to market as a mutual fund. What we like about them is that they continue to use active managers where they have a higher conviction in them, such as emerging-markets equities, but then they go to those low-cost options in more-efficient markets such as U.S. large-caps. This series also benefits from a well-established tactical approach that has added value over the long term.

Dziubinski: And another Gold-rated series that's also pursuing a blended strategy is Pimco RealPath Blend. Tell us a little bit about that one.

Pacholok: Right. So Pimco RealPath Blend does a really great job of balancing its passive and active exposures. For instance, its equity exposure is all through low-cost Vanguard index funds, whereas its fixed-income allocation comes from all active in-house bond funds, and we view Pimco as one of the better bond managers. In 2019, Pimco appointed Erin Browne as the lead portfolio manager of this series. She brings with her a wealth of knowledge on asset allocation. We think her background paired with the firm's well-established investment committee sets this series up for a long-term potential.

Dziubinski: Megan, thank you so much for your time today, walking us through these blended approaches. They sound like really compelling options for investors to consider. We appreciate your time.

Pacholok: Thank you, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.