(April 9, 2014) – A large number of defined contribution (DC) investors have shown a propensity for managing their own assets, despite inflows to target-date funds (TDFs) increasing their grasp on the market.
Some 14.6% of asset flows into US DC plans monitored by Northern Trust’s custody arm were destined for TDFs in 2013, the company said in its annual survey on clients in the sector.
This meant by the end of the year, some 15.7% of all DC assets looked after by the custodian were held in TDF funds, the second largest share of any category.
However, despite many investors opting to let the fund structure decide on their asset mix, Northern Trust noted that a significant number of investors were allocating to sectors themselves.
Fixed income saw outflows of nearly 11% in 2013 as Federal Bank policy changes hit markets. This followed inflows of 9.2% the previous year as fixed income enjoyed happier times.
US mid and small-cap funds enjoyed the benefit of the year’s fixed income outflows, with 6.3% and 4.4% inflows respectively in 2013. During the previous, somewhat chaotic year for global stock markets, these sectors saw outflows.
Sector picking might be a strong suit for DC investors. Small and mid-cap stocks in the US outperformed their large-cap peers—in which they marginally reduced their holdings to become underweight the market consensus—in 2013. The Russell 2000 index rose 31.46% across the year, making a significantly better return than the 25.27% from the S&P 500.
Northern Trust noted that company stock had been reduced across many DC portfolios. The company said this was mainly due to sponsors realising the risk of having a concentration of risk that could adversely impact their members’ investments.
David Fox Jr, head of corporate & institutional services in the Americas for Northern Trust said the company’s tracker offered insights into investor behavior when matched up with market events. “This tool demonstrates how plan sponsor actions, such as adding pre-mixed options like TDFs and focusing on company stock, can help participants construct more diversified portfolios as they invest for retirement.”
Related content: A New Approach to TDFs (and Why the Old One Doesn’t Work) & DC Beats Target-Date and DB Returns in 2013