Design
Target-date funds are aimed at people planning for retirement and have appeal because they offer a lifelong managed investment strategy so should remain appropriate to an investor's risk profile even if left accidentally unreviewed. Research suggests that age is by far the most important determinant in setting an investment strategy, thus Target Date, or age-based funds are particularly attractive as default investment funds. They do not offer a guaranteed return but offer a convenient multi-asset retirement savings strategy through a single outcome-oriented fund.
Target-date funds' asset allocation mix typically provides exposure to return-seeking assets, such as equities, in early years when risk capacity is higher, and becomes increasingly conservative as time progresses with exposure switched progressively towards capital-preservation assets, such as government- and index-linked bonds.
The speed with which a target date fund de-risks its asset allocation is known in the industry as the "glide-path", using the analogy of an airplane (the fund, presumably) coming in for a landing (the landing being, presumably, arriving at the Target Date with the appropriately low-risk mix of underlying assets).
By taking a managed, or stochastic, approach to de-risking the fund, target-date funds offer a higher level of both technical and fiduciary care than earlier lifestyling techniques that rely on an automated, or deterministic, approach.
The theoretical underpinnings to glidepath design are based on combining modern portfolio theory, with the theory of "Human Capital", the present value of expected future earnings.
Read more about this topic: Target Date Fund
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