Performance
Given the relative newness of TDFs in the UK, a performance analysis could be misleading. Once again it is best to look at the US as a benchmark, especially as TDFs were subject to considerable scrutiny after the recession of 2008-09, including a congressional hearing and a report from the General Accountability Office. The issue of more than a decade ago was that both long and near-term TDFs suffered large losses.
However, there has been a marked improvement since then, as shown by performance during the recent 2020 stock market crash. Between February 19 and March 23, the US stock market fell by about one-third and, while most of the long glide path funds did not do significantly better or worse than a pure equity fund losing between 30 and 35 per cent of their value, the short glide path funds, such as those with 2025 maturity, lost just between 20 and 25 percent of their value over the five weeks.
What is probably more significant is that funds that reached the end of their glide path in 2020 ended the year up 10.8 per cent on average, according to data from Morningstar.
ESG and TDFs
Unless one has a lot of time and determination, constructing a balanced ESG retirement portfolio is a challenge. While there is increasing information on funds, this alone is not a full representation of ESG as most investors also want to know that the investment provider follows the same ESG policies as the assets that they select for their funds.
Products and providers will be assessed going forward
Another issue is that, at the moment, it is clear that not all ESG financial products are being launched by providers with the most robust ESG policies.
Recent research from GaiaLens showed that of the four most prominent ESG investing companies, one had four of its listed businesses in the third quartile of the sector and the other two were in the second quartile. In comparison, its three major competitors all had two or more listed entities in the first quarter.
Currently this disconnect is not a major issue as investors are primarily interested in the makeup of the ESG investments that the asset managers offer. But as greater regulatory scrutiny is likely, it would be hard for a pension fund or its trustees to justify sourcing compliant products from a manager that did not adopt similar policies.
