PANC 2012: Next Generation of Target-Date Funds

To mitigate the volatility of the equity markets and make good on their promise to prepare investors for retirement, TDFs will become more diversified and use tools to mange risk, said Adam McInroy, vice president, Goldman Sachs Asset Management, (GSAM) Global Portfolio Solutions.

Customization is also on the horizon, speakers said. “Ten to 15 years ago, there were mainly proprietary fund offerings,” noted Jeb Graham, partner, CAPTRUST Advisors. “It was a big deal when you saw multi-manager platforms, primarily from insurance companies, which picked all the funds. The first target-date funds were all proprietary, and there was no selection. Today, providers offer multiple platforms, including custom target-date funds for investments and glidepath selection.”

Graham foresees custom TDFs of the future using more options, alternatives and hedging strategies—not just to diversify the portfolio, but also to reduce risk.

Glenn Dial, managing director and head of U.S. retirement distribution at Allianz Global Investors, characterized these developments—not least of which is risk management—as “the DB-ization,” or adoption of defined benefit practices, “of the target-date world.” Dial said Allianz has developed a benchmarking methodology to analyze risk exposure and equity weighting of TDFs.

“Every target-date fund should have a publicly available risk benchmark, and we believe every target-date fund manager should have a benchmark in terms of standard deviation,” Dial said, noting that the available tools for measuring stock and bond mutual funds were not designed for target dates, which are funds-of-funds.

Risk management is now paramount for TDF managers, Dial maintained. “Retirees are hyper risk averse,” he said.

Global Sachs Asset Management has tried to address these concerns by focusing not just on diversification of target-date funds but also on the right allocation of these holdings, McInroy said. As target-date funds have embraced “international, small-cap, real assets, high yield, fixed income, emerging markets debt and commodities—because these asset classes are volatile on their own, we spent a lot of time on allocation,” he said. “We also look at fees, which are higher the less correlated an instrument is to equities.”