Frost & Sullivan North American Lifecycle Funds Analyst Briefing

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Frost & Sullivan’s analyst briefing on the North American Lifecycle Funds market.

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Frost & Sullivan North American Lifecycle Funds Analyst Briefing

  1. 1. North American Lifecycle Funds Market – What is driving its enormous growth? Kavitha Chakravarthy, Research Analyst Business and Financial Services, Asset Management October 21, 2008
  2. 2. Focus Points Introduction Market Analysis Investment Analysis Conclusion 2
  3. 3. Introduction • Frost & Sullivan’s Financial Research team has recently completed an extensive review of investment opportunities in the North American lifecycle funds market. • The study highlights the growth segments in the North American lifecycle funds market, and identifies specific investment themes and opportunities within the market. • It includes a comprehensive overview and in-depth financial analysis of the North American lifecycle funds market covered by Frost & Sullivan. 3
  4. 4. Scope of Research Segments Included Major Industry Participants • Lifecycle funds • Fidelity Investments • Lifecycle exchange traded funds • Vanguard • T Rowe Price • Principal Investors • American Century Investments • Barclay’s Global • DWS - Scudder • Mass Mutual • TIAA - CREF • Russell Investments • Wells Fargo Advantage • Vantage Point Funds • TDAX Fund, Inc. 4
  5. 5. Focus Points Introduction Market Analysis Market Overview Historic Growth Market Trends Segment Analysis Investment Analysis Investment Themes Growth Monitor Conclusion 5
  6. 6. Lifecycle Funds Market and the Current Financial Crisis Market Analysis • Retirement plans in the U.S. have lost around $2 trillion (20% of the assets) in the past 15 months due to the current financial crisis. • Withdrawals and loans on 401(k) plans are on the rise. • The depletion of retirements assets is expected to delay people’s retirement. • Investors that are near retirement age are expected to be the worst hit by the current economic crisis. 6
  7. 7. Lifecycle Funds Market and the Current Financial Crisis Cont… Market Analysis • Around 90% of the lifecycle funds assets are comprised of retirement assets. (March 2008) • The current financial downturn will have a neutral or a marginally negative effect on the demand for lifecycle funds. • Lifecycle funds are based a glidepath approach of asset allocation. The near target date funds have lesser exposure to equity and are insulated from the current crisis. The distant target date funds have a higher exposure to equity. However, distant target date funds have sufficient time to recover. • Lifecycle funds are likely to witness increased participation from 401(k) in 2008. • The lifecycle funds market in the U.S. was $185 billion in March 2008, up from $183 billion in December 2007. 7
  8. 8. Historic Growth Market Analysis Historic Growth Market Trends Segment Analysis Pension Protection 200 Lifecycle fund Act,2006 183 185 180 assets grew at a Compound Post stock market Lifecycle Fund Assets 160 Annual growth downturn in 2002 rate (CAGR) of 140 48.7 percent 114 ($ Billion) 120 (1998 – 2007) 100 80 71 60 44 40 26 12 15 20 5 7 9 0 1998 2000 2002 2004 2006 2008 Q1 Year Source: Investment Company Institute and Frost & Sullivan 8
  9. 9. Market Trends Market Analysis Historic Growth Market Trends Segment Analysis 0.30 Market share of 0.25 lifecycle funds in the 0.22 0.25 total retirement funds Market Share (%) market has been 0.17 0.20 steadily increasing and 0.14 was 0.25% in March 2008 0.15 0.10 0.08 0.10 0.05 0.05 0.03 0.03 0.01 0.02 0.00 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q1 Year Source: Frost & Sullivan 9
  10. 10. Market Trends Market Analysis Historic Growth Market Trends Segment Analysis 200 183 185 Lifecycle funds get a majority of its Lifecycle Fund Assets investments from retirement accounts. In 22 22 2007, retirement assets accounted for 88% 150 of the total lifecycle fund assets in the U.S. 115 ($ Billion) 11 100 122 125 71 44 8 79 26 5 50 12 15 48 5 8 8 3 1 2 11 30 39 38 1 1 3 4 1 6 9 18 25 1 1 2 9 15 0 1 2 5 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q1 Year Individual Retirement Accounts Defined Contribution Plans Other Plans Source: Investment Company Institute and Frost & Sullivan 10
  11. 11. Market Trends Market Analysis Historic Growth Market Trends Segment Analysis 1600 No. of Lifecycle Funds 1400 1200 682 1000 528 800 600 466 366 400 50 174 127 318 200 35 131 289 52 0 2003 2005 2007 2008 Year 2000-2014 Category 2015-2029 Category 2030+ Category Source: Investment Company Institute and Frost & Sullivan 11
  12. 12. Market Share Market Analysis Historic Growth Market Trends Segment Analysis Principal Others investors 5.3% Vanguard 5.6% 19.5% Fidelity 49.4% T Row e 20.2% Source: Investment Company Institute and Frost & Sullivan Note: Others include American Century Investments, American Independence, Barclay's Global, DWS Scudder, Mass Mutual, Putnam Investments, Russell Investments, TIAA - CREF 12
  13. 13. Segment Analysis Market Analysis Historic Growth Market Trends Segment Analysis Rigid Glide Path Lack of Benchmarks Approval of Lifecycle Competition from Funds as a Qualified Lifestyle Funds and Default Investment other mutual funds Industry Alternative Enhancers Risk arising out of Attractiveness of Lifecycle Lifecycle Funds to Uncertainty Funds Investors Market Industry CAGR 2008-14 Competition among Inhibitors Unsuitable for Risk- 16.9% 401(k) Plan Providers averse Investors leading to an increased demand Industry Indecisiveness among Challenges Relatively Young Market Investors over Investment Decisions Isolated Lack of Customization Approach to Investing Source: Frost & Sullivan 13
  14. 14. Focus Points Introduction Market Analysis Market Overview Historic Growth Market Trends Segment Analysis Investment Analysis Investment Themes Growth Monitor Conclusion 14
  15. 15. Investment Themes Investment Analysis Investment Themes Growth Monitor 1. Emergence of Lifecycle Exchange Traded Funds 2. Automatic Enrollment into Lifecycle Funds by 401(k) Plans 3. Transfer of Funds from Lifestyle Funds to Lifecycle Funds Source: Frost & Sullivan 15
  16. 16. Investment Themes Investment Analysis Investment Themes Growth Monitor 1. Emergence of Lifecycle Exchange Traded Funds 200 7 6 6 6 6 180 6 5 6 160 5 5 5 No. of Hybrid Funds ssets 140 170 170 176 146 5 120 TF A illion) 138 100 119 119 4 ($ M 111 Hybrid E 80 93 3 60 40 2 20 0 1 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Month Hybrid ETF A ssets No . o f Hybrid Funds Source: Investment Company Institute and Frost & Sullivan 16
  17. 17. Investment Themes Investment Analysis Investment Themes Growth Monitor 2. Automatic Enrollment into Lifecycle Funds by 401(k) Plans 90 83.86 401(k) Assets Invested in Lifecycle Funds ($ Billion) 80 70 60 53.13 50 40 31.77 30 19.69 20 11.37 10 4.77 5.68 7.00 0 2000 2001 2002 2003 2004 2005 2006 2007 Year Source: Investment Company Institute and Frost & Sullivan 17
  18. 18. Investment Themes Investment Analysis Investment Themes Growth Monitor 3. Transfer of Funds from Lifestyle Funds to Lifecycle Funds 59.9 40.1 2006 54.2 45.8 50.0 50.0 2004 52.0 48.0 er 45.1 54.9 Ya 2002 39.4 60.6 35.5 64.5 2000 29.2 70.8 25.0 75.0 1998 26.7 73.3 0 20 40 60 80 100 Market Share in Mutual Fund Retirement Assets (%) Lif ecycle Fund Assets Lif estyle Fund Assets Source: Frost & Sullivan 18
  19. 19. Growth Monitor Investment Analysis Investment Themes Growth Monitor Assets under Cash and Fund Management Growth Rank Equity Bond Management Others Company (%) (%) (%) ($ million) (%) CAGR (2008-2014) (%) 8.2 6.4 3.0 Target Date 2000 - 2010 AmCent LIVESTRON Inst 9.8 6.3 43.6 31.6 24.8 Barclays Gbl Inv LP Ret I 105.2 6.7 37.3 50.9 11.9 DWS LifeCom Retir S 72.9 6.6 35.5 50.7 13.8 Fidelity Freedom 2000 1770.0 5.4 25.1 32.8 42.1 Fidelity Freedom 2005 1080.0 6.3 46.9 26.3 26.8 Source: Frost & Sullivan 19
  20. 20. Conclusion • Lifecycle funds are becoming an increasingly popular investment option for retirement savings and a preferred investment for the automatic enrollment of defined contribution plans. • The North American lifecycle funds market is a relatively nascent one, and is experiencing rapid growth and introduction of new investment mechanisms based on the principle of lifecycle investing such as lifecycle exchange traded funds, target date portfolio, and target date index. • The North American lifecycle funds market is a concentrated one, with the top three participants holding a combined market share of 89 percent in 2007. • The North American lifecycle funds market is expected to grow at 16.9 percent in the next seven years (2008 to 2014). 20
  21. 21. Your Feedback is Important to Us What would you like to see from Frost & Sullivan? Growth Forecasts? Competitive Structure? Emerging Trends? Strategic Recommendations? Other? Please inform us by taking our survey. 21
  22. 22. For Additional Information • To leave a comment, ask the analyst a question, or receive the free audio segment that accompanies this presentation, please contact Stephanie Ochoa, Social Media Manager at (210) 247- 2421, via email, analystbriefings@frost.com, or on Twitter at http://twitter.com/stephanieochoa. 22

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