Legg to launch target-date funds

Share of budding market in retirement money could ease firm's recent setbacks

June 25, 2008|By Hanah Cho | Hanah Cho,Sun reporter

Investors are pouring billions of dollars into target-date mutual funds, and Baltimore's Legg Mason Inc. wants a piece of that budding market.

Legg plans to launch its life-cycle funds in August, joining a litany of other firms trying to capture a flow of money that has increased 50 percent annually in the past several years, according to mutual fund tracker Lipper Inc.

Assets in these mutual funds are managed based on specific retirement years like 2020 or 2050.

With some of its key mutual funds underperforming and clients taking money elsewhere, some analysts say Legg's foray is not a bad idea.

"Given the struggles that they're having at their other funds, it's a potential positive avenue for growth for them," said Daniel T. Fannon, an analyst at Jefferies & Co. who does not own stock in the company. "The opportunity for Legg Mason to gain some assets is certainly there."

Assets in target-date funds totaled $189 billion as of April 30, according to Lipper. Last year, those funds held $175 billion in assets, compared with $110 billion in 2006.

"It makes sense," said Greg Carlson, a mutual fund analyst with Morningstar Inc. "Everyone else is doing it."

Target-date funds, whose assets become more conservative as the investor ages, were first introduced in the mid- 1990s.

Target-date funds began to gain in popularity about six years ago near the end of the bear market, Carlson said.

Most target-date funds invest in other mutual funds. Their asset allocation - usually a mix of stocks and bonds and increasingly more alternative investments like real estate - shifts under a predetermined investment path.

More companies are choosing target-date funds as a common default option for retirement plans thanks to federal rules implemented late last year. And as more employers start automatically enrolling workers into 401(k)s and direct employee contributions into target-date funds, investment companies are trying to capture that new business, analysts say.

Insurer Allstate Corp., for instance, introduced ClearTarget Retirement funds in May. And Old Mutual Capital recently launched what it says are the first target-date funds that combine retirement dates with individual risk tolerance.

Today, more than 1,000 target-date funds are available in the market, up from 739 at the end of last year and 278 three years ago, according to Lipper.

"For customers, you have a product that takes care of the diversification and allocation question," said Jeff Tjornehoj, a senior research analyst at Lipper. "And for the fund firm, you're able to maintain assets throughout the complex, and you won't find investors switching from growth products to value products and disrupting the normal flow process."

Even amid stock market volatility at the beginning of the year, investors did not shy away from target-date funds.

Baltimore's T. Rowe Price Group's first-quarter profit grew 6 percent, buoyed by new client investments in its target-date funds. Price's target-date funds total about $30 billion, or 13 percent of mutual fund assets under management. Price launched its funds in 2002.

"If you look at each of the earnings, you could see the increase year over year, quarter over quarter," said Price spokesman Brian Lewbart. "It's been a very successful product for us that's clearly meeting a need for both individual investors and 401k investors."

Legg will offer its Legg Mason Partners Target Retirement series in five-year increments ranging from 2015 to 2050 as well as a fund for investors in retirement. The company's target-date funds will not only invest in Legg-affiliated funds, such as its well-known Legg Mason Value Trust, but also in unaffiliated exchange-traded funds, or ETFs.

Legg's Global Asset Allocation subsidiary will manage the target-date funds.

Steve Bleiberg, the division's chief executive and chief investment officer, said Legg has been intrigued by the possibility of target-date funds since the money manager in 2005 acquired Citigroup's asset management group. Those assets included lifestyle mutual funds, whose allocation is based on risk level.

When the Labor Department last year made target-date funds an acceptable default investment for employer-sponsored retirement plans, Bleiberg said Legg saw that decision as a trigger to move forward.

"You have a large group of people in their late 40s, 50s and 60s thinking about retiring and realizing that they need to save and plan. But also many of them realize that they don't know the right asset mix," Bleiberg said. "It's become an attractive option. You as an investor don't have to worry about it. You know someone else is looking out for this and making sure you have the appropriate asset mix."

Legg declined to speculate on inflows of investment dollars its new target-date funds might generate.

But analysts say Legg's new target-date funds could help bring in new customers. The company has been struggling in recent quarters to reverse the poor performance of stock funds and the tide of clients pulling their money out. Investors withdrew about $44 billion from Legg's stock funds during the fiscal year that ended March 31.

"That's definitely one of the reasons they bring products like this to ensure that they keep a presence in the investors' minds of their capability," said Tjornehoj, of Lipper.

hanah.cho@baltsun.com

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