The Art of Building TDF Glide-Paths Amid Market Disruption

One of the key lessons to remember in multi-asset investing is that there is no free lunch, and those who benefit from taking the most risk are likely to feel the most pain when market conditions sour.


Jake Gilliam, head of multi-asset solutions at Charles Schwab, recently sat down with PLANADVISER to discuss the resurgence of global market volatility—and the way providers of target-date fund (TDF) portfolios confront evolving market conditions.

“In terms of the return to volatility we have seen in early 2022, it has been a long time coming,” Gilliam says. “It is a reminder of why we, as long-term investors, must be strategic and thoughtful in our approach. We always have to remember that it is so difficult, if not impossible, to time the markets. Anyone who is trying to game the volatility and the short-term price swings is likely to get burned.”

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Gilliam says one of the obvious and lasting appeals of multi-asset-class portfolios, such as TDFs, is their potential to provide retirement plan participants with a smoother ride when markets are volatile. It is important to remember, though, that volatility cuts two ways. It is the main source of return as well as the main source of loss, and so it is necessary to embrace some degree of volatility.

“Exposure to volatility is not necessarily a bad thing,” Gilliam adds. “Volatility is simply a measure of the range of price changes—both up and down—an investment experiences over a period of time. The more stable the price, the lower the relative volatility, and vice versa.”

Considered as such, volatility is a measure of investment risk, because higher levels imply that a portfolio’s returns may be less predictable—yet taking that risk can enable the return necessary for long-term wealth accumulation.

“Simply put, with enhanced return on the upside comes the possibility for more rapid losses on the downside,” Gilliam says. “Our job as a portfolio manager is to strategically balance the risk and the reward, remembering that there is no free lunch in the marketplace. The real key to positive performance and to long-term success is to understand where you stand at any given moment, whatever the market is doing.”

Gilliam says the broader shifts occurring in the equity and fixed-income markets have resulted in some modest adjustments to Schwab’s TDF portfolios, noting that the potential for increasing interest rates has altered the landscape for fixed income and the role it plays in retirement portfolios.

“Combined with increasing inflation pressure, which had been largely absent for many market cycles, risks to long-term retirement success have emerged, which we intend to address with these adjustments,” Gilliam says.

Specifically, effective February 1, 2022, Schwab will be moderately increasing equity exposures by between 2% and 5% across the glide path. The firm is also adjusting allocations to real estate and inflation-protected bonds.

Gilliam notes that real estate assets tend to have a low correlation to other equity asset classes, providing additional diversification that may potentially help mitigate the impact of higher inflation over time. To gain these advantages, Schwab is increasing real estate exposure from 5% to 7% of the total equity allocation across the glide path. The resulting exposure ranges between 2% and 7% of the portfolios, with higher levels earlier in the glide path, Gilliam explains.

Prior to these changes, as the Schwab funds approached the target date, they typically had 3% to 5% less equity than peer averages—and significantly less than several top providers.

“With these changes, we expect to be more in line with the peer averages at the target date, but still notably more conservative than several top providers,” Gilliam says. “With this change, we maintain our strong risk management profile during the most critical period, as an investor shifts from accumulation to decumulation.”

On the equity side, allocations to the Schwab Core Equity Fund will be reduced, resulting in a range of a 4.8% starting allocation to a 1.3% final allocation, while allocations to several large cap equity funds will be increased, resulting in a large growth allocation range of a 12.3% starting allocation to a 3.7% final allocation.

“We take a long-term strategic approach to asset allocation and believe that picking market tops and bottoms is very difficult to do consistently,” Gilliam says. “With the 2022 changes, we are seeking to address longer-term factors that could impact successful retirement saving and investing. While capital market return expectations for equities are low relative to history, the equity risk premium compared to fixed income remains attractive.”

Additionally, Schwab’s investment leaders feel it is important to address evolving longer-term fixed income risks. They warn that investors may face the effects of low interest rates for an extended period and then confront the potential impact of eventual rising rates on retirement savings.

“We are seeking to help mitigate the negative impact to our investors throughout our glide path, but especially those near or in retirement,” Gilliam concludes.

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