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
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.”