Capital Group Launches 1st Active/Passive TDF Blend Series

The Capital Group Companies Inc., known for its active investment management strategy, has launched its first blended target-date-fund series that includes both active and passive management strategies.

The Capital Group Target Date Retirement Blend Series combines the firm’s active management strategy with select passive indexing from BlackRock Inc. and State Street Global Advisors; as the glide path manager, Capital Group selects the passive exposures and manages the allocations with a mix of BlackRock and State Street options.

“For us, it’s about offering choice,” says Kelly Campbell, the multi-asset solutions lead at Capital Group, which owns American Funds. “Plan sponsors have different preferences between active management and passive management, and as we assessed the market, we thought bringing a blended strategy would meet these varied needs.”

Campbell notes that Capital Group’s active strategies have found success in a TDF market often dominated by passive funds, with the firm’s funds accounting for about $320 billion in assets. Some of those successful passively-managed TDFs include products from BlackRock, State Street, Vanguard and Fidelity Investments.

The new offering, Campbell says, will have the benefits of the active and passive management along with some fee benefits—with pricing contingent on the amount of plan assets invested.

“If they weight passive more or have a fee range in mind, we think we will be considered by more plan sponsors for this offering,” she says.

Other blended TDF providers include J.P. Morgan Asset Management, T. Rowe Price and Voya Financial.

Blending

The new TDFs are structured as collective investment trusts and are intended for larger retirement plans, according to the firm. The BlackRock and State Street passive exposures will come through a combination of CITs and exchange-traded funds and will be more heavily weighted toward the later stages of the TDF glide path, as investors are looking for more conservative strategies.

“In earlier vintages, we have a lower passive allocation as we emphasize our active equity strategies, focusing on capital appreciation,” Campbell says. “Later in the glide path, our passive allocation increases as we pair investment-grade, passive fixed income with our active, objective-based strategies to help preserve wealth.”

She notes that Capital Group keeps some investments as fully active, such as emerging market equities, emerging market debt and high-yield corporate debt, due to concerns about increased risk “from not incorporating fundamental research.”

The new series manages the glide path for 30 years, with a focus on capital preservation and income generation, according to Capital Group.

“We definitely like blended TDF strategies,” says Rob Massa, managing director of retirement for Prime Capital Retirement. “It allows the target-date-fund manager to focus on adding Alpha (excess return) in market segments that are less efficient.”

For example, Massa notes, large-cap U.S. markets are “increasingly difficult” to add alpha, as they require fund managers to hold larger positions in the stocks of the “Magnificent Seven” technology stocks. In these cases, indexing may be a lower-cost, more-effective option over the long run. Meanwhile, the blended TDF manager can “focus on adding their alpha in market segments that are less efficient, such as real estate, fixed income and emerging markets,” he says.

He adds that, despite a common refrain that indexing outperforms active management in most cases, it does not always hold true, such as when looking at actively managed fixed-income versus fixed-income index funds.

Plan Profile

Overall, however, “target-date-fund analysis and selection should first be based on plan demographics, and plan participant and fiduciary committee risk profiles,” Massa says. “Then that data should be used to help narrow down the choices for the appropriate target-date fund. Cost is always an important consideration, but identifying the target-date glide path or paths that best align with the employee population is critical and should be identified before you settle on the question of active, passive or blended target-date-fund strategies.”  

Capital Group put out its first actively managed TDFs back in 2007 and has been a proponent in the market for active strategies. But as Campbell notes, the firm is also aware of plan sponsor committees often asking about passive options, particularly amid pressure to bring down fees, given litigation concerns.

Capital Group’s decision to create a TDF blend was followed by a due diligence process that led to adding passive exposures from BlackRock and State Street, Campbell says. At the moment, it has no plans to include other passive providers or blends, but it will continue to gauge the market after this initial launch.

Many competitors in the marketplace “start from a stance of passive and consider where active adds value,” Campbell says. “We take a different approach of really having a belief that our active management adds value to the outcomes. We’re the only manager amongst the top-blend peers that retains a measure of active exposure in every asset class.”