TDFs That Tactically Allocate Assets

The wisdom of setting a predetermined glide path for the asset-allocation trajectory of a target-date fund (TDF) spanning maybe 30 or 40 years could be questioned when there are disruptions in the market. This is why some TDF providers are dedicating modest amounts of their portfolios to tactical asset allocation.

SEI Institutional had long been applying this investment technique to its defined benefit (DB) plans, says Jake Tshudy, director of defined contribution (DC) investment strategies at SEI. This prompted the firm five years ago to create the Dynamic Asset Allocation Fund as one of the underlying funds in its TDF series, Tshudy says.

The TDFs allocate up to 10% of their assets to the Dynamic Asset Allocation Fund, but, like equity exposures, this allocation declines as participants approach retirement, he says. To reduce trading fees, the fund uses an options overlay.

“Glaring economic disjoints” guide the fund’s investments, Tshudy says. For example, the fund has recently gone short on the euro and long on the U.S. dollar. “At the same time, if we decide there is a longer-term opportunity with high yield and emerging-market debt, we might make those trades in the fund if we think we are going to hold those positions for a long time,” he adds.

Nonetheless, SEI believes its TDFs’ glide path is “the most important component” driving their investments. In addition to the inclusion of the Dynamic Asset Allocation Fund, the TDFs “do have some funds that are actively managed” but the allocation is managed “from a top-down perspective,” Tshudy says.

Likewise, the TIAA-CREF Lifecycle Fund series includes a tactical asset-allocation program that TIAA has modestly added over the past two years, says John Cunniff, managing director at TIAA and manager of the funds. “We won’t deviate more than plus-5 or minus-5” to the program, he says. “This will never be more than 10% of the relative tracking error. We never want the tactical allocation to overwhelm the funds and, therefore, do not have wide limits.”

Ten years ago, only a handful of investment managers included tactical allocation in their TDFs, Cunniff says. Today, half of the TDFs on the market include this investment strategy, and plan sponsor reception has been positive, he says.