The multiple flavors of T. Rowe Price’s approach to the glide path are designed to give a more customized approach to the most vexing of retirement decisions—when to de-risk a portfolio.
The Baltimore-based firm was an early entrant in the target date fund space and is the largest actively managed target-date manager with $384 billion under management as of November 30, 2021. Their approach is differentiated from the competition in several ways, including when it makes sense to cut back on market exposure for clients.
“When we first entered the target date business in 2002, other firms were taking a very conservative approach to asset allocation,” says Joe Martel, a Portfolio Specialist on the Target Date Solutions Team.
“We were one of the first managers to consider that the retirement funding dilemma does not stop at the age of 65. In our view, one cannot have a very conservative asset allocation unless assets are greater than liabilities. As a result, T. Rowe’s Retirement Solutions product tends to have a higher equity balance than other products in the marketplace.”
The process starts with a glidepath suitability study.
“This is a bit of a manual process,” says Martel, “and we consider all of a prospect’s demographic information, including age and the estimated time of retirement. One of the more important inputs is salary distribution. Typically, the higher an employee’s income, social security replaces less of their spending in retirement, and the more reliance there will be on savings as a solution to the spending replacement gap. Very often a split population occurs, and the portfolio process at that point is driven by who in the organization is more vulnerable to a suboptimal outcome.”
“It is important to note that we do not use an average savings rate or income number,” Martel adds. “We rely heavily on distributions to make sure we are taking care of those folks at the tails. After all, if you design a product for the average individual, you might create a solution that doesn’t work for anyone.”
Another big differentiator for T. Rowe is their focus on the portfolio.
According to Martel, generating “inflation beta” is a challenge because there can be different drivers of higher prices.
“Some firms in the target-date space use funds that need assets or simply haven’t been popular with investors. We include many of our top offerings in our target data products, including our 5-star New Horizons mid-cap growth fund.”
This also includes other funds from their global, non-US equity, and fixed income franchises.
The firm has spent considerable time determining what assets might perform the best in an inflationary environment.
According to Martel, generating “inflation beta” is a challenge because there can be different drivers of higher prices.
“While some scenarios are better captured by owning stocks with pricing power or small caps, others may be more commodity-driven, which best characterizes the current market,” he says.
On the equity side, their current inflation position consists of 40% natural resources, 40% REITs, and 20% metals and miners (they own the stock of producers instead of the commodity itself). In fixed income, T. Rowe favors a short-term TIPs portfolio that is introduced ten years before retirement to protect purchasing power.
Their asset allocation uses a tactical overlay, which goes plus or minus 5% from the appropriate benchmark. The valuation differential has prompted them to be overweight emerging market equities, and they are also tilted toward global versus domestic stocks, says Martel. “We don’t tend to get significantly overweight unless there is a sizable selloff in the market.” They were about 3.5% overweight and were adding risk after the COVID sell in March 2020.
For clients more concerned about limiting volatility, T. Rowe offers a Target Solutions product. This solution is targeted toward firms whose employees are saving larger sums toward retirement, and the glide path has less equity risk and more emphasis on a relatively smooth return stream.
The result of T. Rowe’s emphasis on equities and the inclusion of its best funds has been top-notch performance. 1-, 3-, and 5-year trailing returns have consistently exceeded the Morningstar category average. T. Rowe has also scored at the top of each Morningstar pillar (Process, People, and Parent), a rare accomplishment in the target-date space.
According to Martel, the next iteration of glide path products will likely feature an enhanced degree of personalization.
“It’s difficult to know exactly how this might look, but it will likely entail gathering significant information from an employee once they reach a certain age. At that point, the solution might look more like a managed account where the asset allocation is more targeted. For example, if someone isn’t saving enough, they may have a larger allocation to equities. Many folks in the industry are looking at incorporating this approach at some point.”
Ben Warwick is Chief Investment Officer of Denver-based Aveo Capital Management.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm advises on assets with traditional long-only equity and fixed income, private equity, managed futures, and alternative investment mandates. Warwick is the author or editor of six books on investing, including Searching for Alpha: The Quest for Exceptional Investment Performance (Wiley, 2000).
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