The Markets October 26, 2016

A TDF With Income in Mind May Use Different Asset Allocations

Comparing the asset allocations between traditional and income-oriented TDF portfolios found greater allocations to high income-generating investments, according to a Wilshire analysis.
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Adding a range of high income-generating investments could significantly boost income returns for retirement-stage target-date funds (TDFs), a study suggests.

The research from Wilshire Funds Management, sponsored by the National Association of Real Estate Investment Trusts (NAREIT) was based on portfolio optimizations using 40 years of investment return data through 2015. It found that adding a range of high income-generating assets to a traditional retirement-stage TDF portfolio could boost income returns by nearly 40%, while providing comparable total returns and no increase in risk.

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Wilshire’s research is based on a variation of the mean-variance optimization (MVO) method for portfolio modelling. While traditional MVO models are designed to determine optimum levels of various portfolio assets that will produce a maximum total return for a specified level of risk, Wilshire’s income-oriented mean-variance optimization (IOMVO) model also incorporates a requirement for a specified level of income return.

Wilshire found that a traditional MVO-modeled portfolio that delivered a 2.37% annual income return and a 5.37% annual total return with an 8% level of portfolio risk could be enhanced with IOMVO modelling to deliver a greater annual income return of 3.25% and a comparable 5.27% annual total return with the same 8% level of risk.

NEXT: Change in asset allocations

Comparing the asset allocations between the traditional and income-oriented portfolios:

  • Equity allocations were reduced from 35% of the MVO portfolio to between 3% and 15% of the IOMVO portfolio;
  • High-yield bonds and preferred stocks became key parts of the IOMVO portfolio. The allocation to these assets increased from 9% to between 22.7% and 25%;
  • Non-U.S. developed market stock allocations rose from 4% of the MVO portfolio to between 9% and 23.5% of the IOMVO portfolio; and
  • REIT allocations rose from zero in the MVO portfolio to approximately 8% of the IOMVO portfolio.

“Depending on the income needs of the investor, portfolios that generate less income may require retirees to dig deeper and more frequently into their savings to fund their expenses, potentially resulting in the depletion of their assets while they are still living,” says Wilshire Funds Management Chief Investment Officer Joshua Emanuel. “Income-oriented portfolios with significant allocations to assets like REITs, high-yield bonds, preferred stocks and non-U.S. developed stocks may help investors meet the challenge of producing retirement income with less reliance on their savings,”

To learn more about the Wilshire study, “Income-Oriented Retirement Portfolios: Challenges and Solutions, 2016” and download the full report, visit https://www.reit.com/reitsandretirement.

In Practice October 25, 2016

Trustworthiness Trumps Other DC Adviser Satisfaction Factors

Trustworthiness is a must-have ingredient for brand consideration in the defined contribution (DC) industry, according to a new analysis from Cogent Reports. 
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The brand attribute of “trustworthiness” outranked more easily measured and objective factors such as consistency of investment performance and the experience of the investment team among advisers reviewing defined contribution (DC) plan service providers, according to the latest Retirement Plan Adviser Trends analysis in Market Strategies International’s Cogent Reports series.

In fact, according to the analysis, DC investment managers that fail to foster trust among DC producers have little chance of being considered for new business. The findings closely echo a previous analysis from the firm that considered the role of trust during the individual retirement account (IRA) creation and rollover process.

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“The power of brand trust and its resounding impact on brand consideration cannot be underscored enough—brand trust is vital for gaining traction among DC advisers as well as DC plan participants and affluent investors,” explains Sonia Sharigian, senior product manager at Market Strategies and author of the analysis. “This is one of the most consistent and hard-hitting trends we’ve seen across a multitude of our studies.”

According to Sharigian, any financial services firm that is striving for growth or seeking to maintain its standing needs to pay attention to this metric.

“In an industry that appears to be plagued by lawsuits and negative media coverage, DC investment managers are facing a significant trust deficit,” adds Linda York, senior vice president at Market Strategies International. “As such, understanding current perceptions and monitoring the experience factors that build trust are imperative to the health of a brand’s DC business.”

It is only once trust has been established, York and Sharigian explain, that managers can “pivot to other leading consideration drivers such as value for the money, the experience of the investment team, company investment philosophy and global product offerings.”

Looking at actual firms operating in the DC marketplace, the analysis suggests American Funds, Fidelity Investments, Vanguard, BlackRock, and Franklin Templeton Investments rank highest among DC-focused advisers on trustworthiness.

The full analysis can be purchased and downloaded here. 

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