Tactical TDFs a Better Approach?

According to the 2017 PLANSPONSOR Target-Date Fund (TDF) Buyer’s Guide—our sister publication’s latest—55% of TDF providers employ some type of tactical strategy in the ongoing management of their products.

Of the 18 fund managers that allow for tactical deviations in their funds, 78% may deviate from the glide path in all of their TDF suites, while 23% use a deviation in some offerings but not in others—for example, using tactical deviations in only some TDF vintages.

SEI Institutional has long employed tactical strategies in its defined benefit (DB) plans and seven years ago began implementing tactical management within its target-date series, says Jake Tshudy, director of defined contribution (DC) investment strategies with the firm. SEI does this by including the Dynamic Asset Allocation Fund as one of the underlying funds in the series, says Tshudy, adding that its contribution never exceeds 10%. As participants approach retirement, the allocation to the Dynamic Asset Allocation Fund is brought down to 0%, he says.

The fund manager looks out for economic challenges and places trades that are high conviction for the longer term, he says. For example, “The most recent large bet the fund took was to go short on the euro. At the same time, if we decide there’s a longer-term opportunity with high yield and emerging debt, we might make those trades in the fund if we think we’re going to hold those positions for a long time,” Tshudy says. “The fund has a high tracking error because it is meant to exploit longer-term bets.”

In addition, SEI has added a risk parity fund tied to volatility that takes a similar approach but trades with more frequency, Tshudy says.

Prudential’s Day One target-date fund series also has the ability to react to significant market events, says Doug McIntosh, vice president, investments, at Prudential Retirement. “There is a firm-wide reassessment of market environments on an annual basis, and our portfolio managers update their capital market forecasts every quarter,” McIntosh says. However, the Day One funds typically adjust their holdings only annually, he says.

 “There is a definite place for tactical moves,” McIntosh says, “whether to equities, fixed income, commodities, real estate or Treasury [inflation-]protected securities [TIPS]. However, because target-date funds are long-term products, we also want to make sure we’re remaining true to the glide path. … We’re focusing more of our intellectual horsepower on the long term to get that right.”

This is why the Day One funds typically permit deviations only in the 50- to 100-basis-point range on alpha and 1% on volatility, he says. As with SEI’s Dynamic Asset Allocation Fund, this tactical approach to the glide path is gradually dialed down as people near retirement, to keep them from being “vulnerable,” McIntosh says.