Target Date Fund: Your New Landlord?

by | Dec 8, 2023 | Videos

Target Date Fund: Your New Landlord?

How in the world can your Target Date Fund be your next landlord?

In episode 363, Tom discusses how a Target Date Fund – these funds are often one of the default fund choices for many retirement plan investors (and college savers!) are scooping up direct real estate purchases to hold in their portfolios.

Real estate – in investment portfolios – like a Target Date fund – were represented by Real Estate Investment Trusts (REITs).
No longer!  This is not your Father’s Target Date Fund!

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Transcript for Target Date Fund: Your New Landlord?

Your target date fund may be your new landlord and we’re going to talk about that.

Welcome to the Mullooly Asset Show, I’m your host Tom Mullooly, and this is episode number 363. Thanks for tuning in.

Your target date fund may be your new landlord!
How is that even possible? That sounds ridiculous.

We’re finding out more and more target date fund are investing in direct real estate.

Meaning they are taking their investors’ dollars and
– They’re buying apartment complexes.

– They’re buying office parks.

– They’re buying shopping centers.

-They’re buying warehouses.

How is this even possible?

Well, let me hit the pause button for a second here and just explain what a target date fund is.

When you see a fund that’s a target date fund, and it says “Target 2040” “2050” “2060”.

The investments – and the allocation of those investments inside your fund are managed. So that when you reach 2030, or 2040 – or 2050 – at some point in the future when you get to that point – twenty years from now – most of the investments are going to be in something “lower risk.”

You won’t have that much exposure to the stock market or really growth. The allocation will be more in “secure” things.

It’s directed towards the day – the date – you intend to retire – or need the money.

So these things (Target Date Fund) worked out great for college funds and for retirement plans.

But things may be coming off the rails.
And I think it’s important that you know about this.

When you look under the hood of a target date fund – you’re going to find some mix of stocks (mutual funds) for growth. And then you’re also going to find some investments that are invested for income.

On the income side you’re going to find:
– a short term bond fund
– an intermediate term bond fund
– a longer term bond fund

You’re going to find a junk bond fund. And you’re also going to find – periodically – a real estate investment trust, which trades as a fund.
Part of these are now being replaced with direct investments into an apartment complex.

It’s really a head scratcher when you stop and think about it.

Prior to 2017, only 3% of all mutual funds invested in direct real estate projects.
Fast forward to today, and 21% of all mutual funds have some degree of exposure to direct real estate.
It’s exploded in the last couple of years.

Is this going to be a good investment moving forward?
We don’t really know.

See, direct real estate investment – like what we’re talking about – used to just be the realm of pension plans and insurance companies.

They could do that, because they have a 30-year time horizon, 40 years. Sometimes even 50 year time horizon.
They’re going to need that money in the future – for future payouts.

A Target date fund? Not so much.

So we’re a little puzzled to see the amount of funds starting to get plowed into direct real estate investments.
And you’re going to be surprised (I think) at some of the names investing directly into real estate.

Fidelity Freedom funds – their target date fund are now investing in direct real estate.

JP Morgan – their “Smart Retirement” target date funds are now doing the same thing.

And TIAA-CREF is also investing their “LifeCycle” target date funds into direct real estate.

Again – is this really a good idea?
I can’t speculate on whether it’s a good idea – what the short term performance is going to be like for direct real estate.

I *CAN* tell you that these assets are NOT liquid.

Mutual funds – by law – can only have up to 15% of their assets in non liquid investments – like real estate.
So they’re going to be capped. But we’re seeing more and more funds put money into these investments.

It’s something we talk about all the time when we’re meeting with clients: you need to KNOW how your money is invested.

This shouldn’t be a surprise. The fact we’re seeing more money get invested into direct real estate is eye popping – for us – to see, the amount funds that now own direct real estate.

We don’t know if that’s going to be such a good idea 5 years from now, 10 years from now.
We think you ought to know.

That’s the message for episode 363.
Thanks – as always – for tuning in.

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