Products July 1, 2014

MFS Releases Flexible Equity Fund

MFS Investment Management has released the MFS Managed Wealth Fund, a flexible equity fund that seeks to provide capital growth with moderate volatility.
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The fund also aims to mitigate the effects of significant declines in equity markets. In seeking to achieve its total return investment objective, the fund will invest in three underlying MFS funds—MFS Growth Fund, MFS Value Fund and MFS Institutional International Equity Fund—for exposure to U.S. and international equities. The fund will also use derivative instruments to manage its net exposure to the equity market, based on its management team’s view of risk and reward opportunities.

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“This unique fund offers investors broad global equity exposure through three well-established MFS funds, with an eye on lowering volatility,” says Jim Jessee, president of MFS Fund Distributors, Inc., and co-head of Global Distribution for MFS, based in Boston. The fund is part of MFS’s suite of outcome-oriented funds for investors and advisers looking for market exposure with strong equity diversification and risk management characteristics.

Portfolio manager James Swanson, MFS’s chief investment strategist, will serve as the fund’s lead manager. Joining him are Michael W. Roberge, MFS president and chief investment officer, William J. Adams, co-head of MFS’s Fixed Income Department, Barnaby M. Wiener, an international equity portfolio manager and Robert M. Almeida, Jr., an institutional equity portfolio manager. These portfolio managers are responsible for determining the target strategic allocations to the underlying funds and actively managing the fund’s net asset class exposure.

MFS expects the fund’s target allocation to be equally weighted among the three underlying funds. The management team will have the ability to reduce the fund’s exposure to the equity market and currency markets, and potentially add exposure to additional asset classes primarily through the use of a tactical overlay. The overlay will use derivative instruments, including futures, forward contracts, options, structured securities and swaps. In addition, MFS may seek to limit the fund’s exposure to certain extreme market events. Some investment experts believe derivative overlay strategies offer an array of benefits, which can include securitizing idle cash, maintaining policy target exposures and managing transitions within the portfolio (see “Overlay Strategy Keeps DB Investments on Target”).

The fund will be available for purchase in multiple share classes (A, B, C, I and R1 to R4) through financial advisers, financial planners, broker/dealers and other financial intermediaries and retirement platforms.

Products June 30, 2014

A New Proposal for Monitoring TDFs

Whether a target-date fund (TDF) series is considered “to” or “through” retirement is not the appropriate basis for determining its peers for comparison, contends Cammack Retirement Group.
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In a recent report, “A Better Methodology for Monitoring Target Date Funds,” Cammack notes that TDF performance, like the performance of any other fund in an investment array, should be analyzed relative to a similar peer group. Many existing tools and methodologies begin the process of identifying peer groups by lumping together TDFs based on whether they are designed to reach their lowest, most conservative equity exposure at the target retirement date (“to retirement”), or at some point years after the target date (“through retirement”).

However, Cammack says it found that relying too heavily on the “to” versus “through” label as a TDF classification system can be misleading. For example, if a plan sponsor currently offers a “to retirement” TDF option, most analytical tools would disregard all TDFs classified as “through retirement” options for comparison purposes. Yet the glide path of the plan’s “to retirement” option may be similar to the glide path of certain TDF options classified as “through retirement,” making them an appropriate member of the peer group, according to the report.

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“We wanted to look at the available target-date fund universe and determine how we can more appropriately monitor them,” Scott Bauman, investment analyst at Cammack Retirement Group in New York, New York, tells PLANADVISER. “The glide path is the most important thing for classification [of a target-date fund] because it will drive performance.”

Bauman explains there are two overlying philosophies for glide paths: preservation of capital (from the more conservative TDF managers) and extension of capital (from those managers more concerned with longevity risk). Within the two philosophies, the glide path may be conservative, moderate or aggressive in its investment style. Under Cammack’s proposed methodology for monitoring TDFs, plan sponsors would determine which philosophy and investment style are used for their funds and select the peer group for comparison based on these factors, regardless of whether they are called “to” or “through” TDFs.

According to the report, Cammack’s next step was to determine whether certain stages in a participant’s retirement savings life cycle have a potentially greater impact on overall retirement savings outcomes. Researchers analyzed the behavior of a sample set of 82,000 retirement plan participants, from various company types, sizes and recordkeeping arrangements, and found the majority of assets were in the accounts of participants ages 45 to 65, meaning decisions made during this period could have an more determinate impact on outcomes. This age group was more likely to still be with the employer when they retire and to leave their assets invested in a TDF through the accumulation phase. In addition, they are the most susceptible to economic downturns such as the 2008 recession, the report says.

“We saw discrepancies in performance [between different TDF series] and wanted to streamline the comparison,” Bauman says. “To see the performance on a level playing field, the comparison should not just focus on asset classes, but a specific portion of the glide path—corresponding to participants ages 45 to 65.” According to Cammack, retirement plan fiduciaries and committees should give greater emphasis to the glide path construction from ages 45 to 65.

Based on its analysis, Cammack took eight TDFs that have an extension of capital philosophy and a conservative glide path and plotted their glide paths. Additionally, it applied a weighting for each age group, and created six groups of TDFs, giving greater weighting to their equity exposure in the 45 to 65 age range.

The six categories enable plan fiduciaries to evaluate the performance of a specific TDF against a true peer group, the report says. Plan fiduciaries can determine if they are getting the best performance for the type of TDF they chose. In addition, the process provides a disciplined approach for satisfying and documenting the plan sponsor’s fiduciary responsibility to monitor investment options and replace options, as warranted.

Cammack notes plan sponsors should keep in mind that the universe of TDF options is fairly small. Whereas there may be hundreds of small cap funds to compare, there are only approximately 50 TDF products series. Therefore, the performance comparison, once grouped according to this methodology, may involve only eight to 12 funds.

The company says its methodology is sufficiently flexible to incorporate new TDF products that enter the market, and it is able to adjust age-weighting during glide path analysis for plans with a unique demographic profile.

As Bauman suggests, if a plan sponsor finds the current TDF series is underperforming, the sponsor can find an alternative option within the same peer group if it determines its glide path criteria is still appropriate for the plan. He notes Cammack’s methodology is not a suitability tool, it is for monitoring TDFs already chosen by plan sponsors.

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