Wells Fargo launching 'completely different' target date funds that take an active approach

The retirement funds, the firm's second to market, seek to give investors 80% pre-retirement income replacement

Nov 24, 2015 @ 11:40 am

By Greg Iacurci

Wells Fargo & Co. is launching its second target-date series next month, a vast departure from the asset manager's current lineup.

Wells Fargo Dynamic Target Date Funds, scheduled to hit the market Dec. 1, incorporates tactical allocation, volatility management and hedging strategies with the goal of increasing the likelihood an investor will achieve an 80% pre-retirement income replacement.

An 80% income replacement, which includes Social Security income, is a common benchmark to gauge an individual's retirement readiness.

The series, a group of 11 funds, has a fairly aggressive glidepath, with a target equity allocation of 90% at its most aggressive, paring down to 51% at the time of retirement, and ultimately settling at 35% a decade after retirement. Two-thirds of the portfolio is invested in actively-managed funds, with the remainder in exchange-traded funds.

Conversely, Wells' existing series — the Wells Fargo Dow Jones Target Date Funds — is much more conservative, with a 28% equity allocation at retirement that drops to 20% after 10 years. The series is passively managed, and doesn't have any exposure to alternative asset classes.

“This series is completely different from Wells Fargo's current offering in almost every aspect,” according to Jeff Holt, multi-asset analyst at Morningstar Inc. “That's interesting because when fund firms launch target date series, they're a different flavor but usually have the same foundation, whereas this is a completely different offering within the same fund firm.”

The Dow Jones series had approximately $16 billion in assets through October, making Wells Fargo the eighth-largest manager of target date mutual funds by assets, according to Morningstar.

Launching a second suite of TDFs helps cater to a broader base of advisers and plan sponsors, according to Ron Cohen, head of RIA and DCIO sales at Wells Fargo Funds.

“We recognize there are different audiences, and we think we have two products that match the needs of those different audiences,” Mr. Cohen said.


The Dynamic series of funds uses tactical asset allocation, which allows managers flexibility in portfolio management to make strategic moves based on the market environment. The portfolios can deviate up to 15 percentage points from their target asset allocations.

That's a bit higher than the norm, usually around a five to 10 point maximum shift for those using tactical allocation, Mr. Holt said.

The funds also have a volatility management component. In periods of high market volatility, managers can reduce equity exposure, thereby dampening volatility, by selling a basket of equity and currency futures; conversely, in times of low volatility, managers can increase equity exposure by buying the futures, according to Kandarp Acharya, co-portfolio manager.

Using futures to increase or reduce exposure, rather than buying or selling underlying funds, is more efficient, liquid and inexpensive, Mr. Cohen said.

And although the funds are aggressive in their equity exposure, fund managers aim to offer a level of downside protection via tail-risk hedging. This means that Wells is essentially using a shorting strategy to protect against downward market moves. The shorting is "dynamic," Mr. Acharya said, because managers short more if there's a market downturn and don't short at all if the portfolio has run up significantly.

Based on simulations Mr. Cohen and Mr. Acharya have run on glidepaths among the top 10 TDF managers, they believe their funds significantly increase the likelihood an average investor will achieve an 80% income replacement at retirement. And, in the event there is a shortfall, the relative severity of it will likely be less, they said.


Wells Fargo's Dow Jones series has had $700 million in outflows since the beginning of the year, making it only one of two asset managers — the other being Fidelity Investments — that have seen net redemptions year-to-date, according to Morningstar. Those TDFs had their heyday during the 2008 financial crisis because of their more conservative nature, Mr. Holt said.

Wells has a few hurdles to overcome to garner significant assets in the new TDFs, Mr. Holt added. For one, sponsors of defined contribution plans tend not to switch TDF managers often unless they're switching record keepers, for example, because doing so tends to be “pretty disruptive” for participants, who are increasingly putting their money in such funds.

“The new series is coming with a very active approach without a track record,” Mr. Holt added. “So it could be challenging to get plan sponsors on board, even if they agree conceptually with the approach, without a track record of success.”

TDF fees have been a “focal point” for many plan sponsors, Mr. Holt said. The Dynamic funds will be available in five share classes, with the lowest expense ratio ranging from 52 to 62 basis points. The highest share class carries expenses ranging from 98 to 108 bps.

That compares to an average asset-weighted expense ratio of 78 bps for other TDFs on the market, according to Morningstar. There are currently more than 50 target date mutual fund series.


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