Glide path issues are a thing of the past, and innovation in the target date fund space continues to excite. Here are the fund families (in no particular order) that 401(k) advisors can confidently look to for help with plan their sponsors and participants.
Where is the market headed? Who cares? It might sound flip, but for target date fund investors, the product’s performance and their own behavior (at least when compared with their taxable and non-retirement focused counterparts) puts them at a significant advantage, no matter what may come.
Last summer’s Morningstar conference was a de facto debutante ball; a reintroduction of the product to investor society with general agreement on its effectiveness in 401(k) plans. Often overheard was the “stickiness” of target date fund assets, and how investors “stayed the course” through the worst of 2008 and 2009.
Curious about who’s really doing it right—the funds families with a deep expertise and proven TDF performance that sets them apart—we once again turned to Morningstar. Some names we expected, other had us surprised. Here’s what they gave us.
Voya Investment Management
“INVESTORS ARE STICKING with target date funds over time. In fact, we are seeing higher investor returns in target date funds than in the underlying category returns.”
We couldn’t find a more perfect way to begin a profile. What product or service provider wouldn’t want to hear something similar about what they manufacture and distribute?
“In 2009, target date funds did not experience a significant outflow of equities,” Susan Viston, client portfolio manager and head of investment services for multi-asset strategies and solutions (MASS) at Voya Investment Management, continues. “They were the only class of investors that did not. Overall, TDF users have more confidence and make higher contributions than non-TDF users.”
No wonder Voya and Viston are so excited about target date funds, and specifically “our more conservative glide path and our active/passive multimanager approach, which gives us a broader diversification of asset classes.”
Taking each in turn, Viston notes their glide path is designed to protect against significant down markets “right before retirement,” by which she means the 10 years prior.
As for their active asset/passive stance, she argues that “no firm can manage all asset classes, so we are open architecture and a blend of active and passive managers. The majority are non-proprietary managers, more than 50 percent,” which she says “leads to better risk-adjusted returns over time.”
Charles Schwab Investment Management
LIKE SO MANY other areas, Schwab was a pioneer in open-architecture target date funds in collective investment trusts, starting out in 2000 (more on that in our collective investment trust feature, which will be posted to the site shortly. For now, we’ll stick with the target date strategy, regardless of the mutual fund or CIT delivery mechanism). The result, according to Jake Gilliam, senior multi-asset class portfolio strategist for Schwab Target Funds, is “best-in-class glide path strategies.”
“We hire third party money managers, and are not beholden to any one specifically,” Gilliam says, which fits with Schwab, the granddaddy of them all when it comes to the aforementioned open architecture. “Also, our glide path difference is that we don’t only look at the percentage of stocks versus bonds, but also balancing risk in the underlying stocks and bonds, which is a much more sophisticated way of investing.”
Schwab Target Funds are professionally managed according to the clients’ approximate target date for retirement. Each target fund has its own investment objective and automatically adjusts its asset allocation to be more conservative over time.
When clients are years away from retirement, a higher proportion of their assets are invested in equity to provide more growth potential, and the opportunity to build your assets and keep up with inflation.
When clients are closer to retirement, a higher proportion of assets are invested in bonds and cash investments to provide the increased stability and income needed in preparation for retirement. At the target date, the fund will be invested in approximately 40 percent equity, 54 percent fixed income, and 6 percent cash and cash equivalents.
PNC Capital Advisors
MARK MCGLONE GETS RIGHT TO IT.
“We came at the target date fund approach differently,” says the president and chief investment officer of PNC Capital Advisors. “We tried to model in a way that said, ‘you’re young and have 30 to 40 years to save for retirement. We want to minimize the possibility you will come out of your working life with a negative real return.’”
Well, yes it may sound obvious, but then why do so many money managers mess it up? PNC’s not one, and McGlone attributes the following four factors to its success.
- Their asset allocation model arrived at a glide path that reduces equity and increases not only fixed income, but also cash and TIPS.
- Open architecture – PNC utilizes internal and external mutual funds and ETFS. “We don’t have all the capabilities internally, so we use external sources,” says McGlone.
- The firm uses a combination of active and passive managers, and makes sure that active managers “are indeed adding alpha.”
- “We have solid performance in our proprietary funds, which are a majority of the portfolio,” he says.
“People have learned lessons about target date funds,” McGlone concludes. “They’re products with long time horizons, and we haven’t seen much movement in and out with recent volatility. They realize these funds are designed to give them retirement funds when they need it most.”
John Hancock Investments
AHEAD OF THE CURVE; it’s how they roll, whether it’s in target date education (before it was required by the Department of Labor), their multimanager approach or their experience in constructing glide paths.
“Our performance is a reflection of the way we approach building our funds,” says Nathan Thooft, co-head, senior managing director and senior portfolio manager, global asset allocation, portfolio solutions group with John Hancock Investments (we envy the title). “Our process in constructing asset allocation models goes back to the 1990s. It is a multimanager, multi-asset class approach, which provides a lot of tools to create well-constructed portfolios and strategies.”
Thooft notes it allows them to stay abreast and ahead of regulation.
“The DOL says that managers should consider non-proprietary strategies, and our multimanager structure therefore solves for it. There are also concerns about the rising interest rate environment after 30 years in a declining rate environment. We have products and strategies in place to address this. So between the longevity of our team in constructing asset allocation models, our multimanager process and our multi-asset class approach, we’ve got it covered.”
As for what’s next, Thooft is “of course” seeing more of a focus on fiduciary issues. Fees, in particular, are receiving a large amount of attention and John Hancock made a concerted effort to lower fees in the past year, “so we’re ahead there as well.”
“Lastly, the macro-environment is an issue for us, and we’re very proactive in seeking out new sectors to assist with better risk-adjusted returns. The development of liquid alternative investments has made it easier to offer better protection against downside risk, and it’s something we include in our strategies. In that vein, we’re constantly looking to implement new asset classes with diversifying benefits in a cost-effective manner.”
T. Rowe Price
AT THIS POINT, the terms “glide path” and “T. Rowe Price” might as well be synonyms. We’d be hard-pressed to think of another company that’s given us so much glide path information over the years. We get it; they’d done a lot (and we mean a lot) of research on the subject. The results speak for themselves. As we said, think of sustainable glide paths, and T. Rowe price immediately comes to mind.
“There are four drivers of target date fund performance,” says high-profile T. Rowe target date manager Jerome Clark. “They are glide path design, which is a critical component; how you then diversify that glide path design; what you use from there—either active, passive or enhanced performance, and lastly; whether or not the target date provides for tactical allocation.”
T. Rowe Price, he claims, does well with all four. Other managers aren’t firing on all cylinders, but all four of T. Rowe’s have done well at different times.
“The biggest impact is with the first, which is the glide path design. Together, the impact of the other three do not equal the glide path design, although they are still very important.”
The company, of course, is known for having a higher than average equity component, which Clark says is the biggest contributor to its solid performance.
“We broadened our international allocations in 2007 into emerging markets, beginning with 15 percent of our exposure and eventually increased to 30 percent of our exposure,” he concludes. “We also moved into international bonds. The underlying active management has done very well. Our tactical allocating consists of 18 sectors, both equity and fixed income, which we overweight and underweight.”
Fidelity Investments
FOR FIDELITY, IT’S ALL ABOUT big data. Being the largest 401(k) record keeper in the United Sates has its advantages. They’re going to be sure they use it wisely, for everything from examining participant behavior to aiding in developing more customized target date fund products.
“Right from the outset, we establish goals for the funds, which are income replacement goals,” says Mathew Jensen, director of target date strategies with investment behemoth Fidelity Investments. “We have conducted a lot of research on income replacement. We know retirees will have to replace about 50 percent of their pre-retirement income. If the investor does their part in terms of saving and we do our part, they’ll have it. Retirement math is the driver behind the numbers, and the math doesn’t lie.”
As mentioned, Fidelity is the largest TPA in the United States, and they incorporate the data they accumulate into the design of their funds.
“We do a lot of research on loan behavior, for instance, and its implications on successful outcomes,” he notes. “Under the heading of personalization, we constantly ask ourselves how much more we can know about participants.”
Fidelity then looks to the delivery of these funds, whether it’s fully active or fully passive mutual funds, separately managed accounts or collective investment trusts.
“We want to make sure the investment techniques for defined contribution plans are able to be implemented in target date funds for decades, and are cost-effective with the necessary liquidity.”
For that last reason, Jensen concludes, Fidelity also does a lot of research around risk capacity that incorporates behavioral economics.
“We’re talking about people’s retirement hopes and dreams, so we have to know as much as we can.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
I’m curious if the Morningstar analysis included any CITs. Since some of the specific strengths mentioned (DC appropriate/liquid alts, active/passive blend, real alpha, open architecture) are all attributes of Callan’s GlidePath Funds, which also happened to be at or near the top of the charts on performance, just wondering if they were excluded because they are CITs.