When benchmarking a target-date fund (TDF), “the key point is to shift the focus from
measuring the fund against a custom index to actually meeting the goal of achieving
equal consumer discretionary spending pre- and post-retirement,” says Sabrina
Bailey, global head of retirement solutions at Northern Trust Asset Management
in Chicago.
“The defined benefit (DB) world has been using this approach for decades, and
after the passage of the Pension Protection Act, their view of liability-driven
investing increased significantly,” Bailey says. “In the DC [defined contribution]
construct, the liability is the target retirement income and measuring the
savings rate to keep up with that liability. For example, if an individual is
on track for retirement or a plan sponsor has a strong plan design, they could
take less risk in the investment portfolio and still achieve equal consumer
spending pre- and post-retirement while avoiding a down market.”
Northern
Trust outlines this more conservative approach to creating a TDF glidepath in
its white paper, “What’s the Funding Status of Your DC Plan?” The paper states: “Assets
within a DC plan should serve a purpose, and that purpose is not to accumulate
a large amount of excess assets over one’s working career. A DC saver’s excess
assets may likely be used more effectively elsewhere during the accumulation
phases, i.e. to pay down debt prior to retirement.”
“Additionally, well-documented behavioral research studies indicate that the
pain retirement savers experience from investment loss is greater than the joy
derived from equal upside gain. Therefore, TDF investments should aim to meet the retirement liability, as opposed
to exceed the liability,” according to the Northern
Trust white paper.
To accomplish this, Northern Trust’s TDF series, its Focus Funds, have a
proprietary Income Replacement Rate Framework that allows the firm to determine
the appropriate replacement rate for participants in different DC plans, Bailey
notes. To accomplish this, Northern Trust “looks at what participants are
making today; what they are saving; balances ; the plan design, including
company matches, deferral rates and escalation; taxes; and the average
retirement age,” she says.
Thus, as opposed to off-the-shelf TDFs that
might predetermine an income replacement ratio of 75% or 80%, for a particular
plan, Northern Trust might determine that it is actually 78%, and that will
then let the asset management team know what the asset allocation should be for
that particular plan, or even build a custom TDF, Bailey says.
NEXT: Goals-driven investing
Northern
Trust’s TDFs are also built to provide downside protection, according to another white paper by the firm, “Glidepath Innovation to Drive Better Participant Outcomes.”
The paper states: “Our glidepath design and construction process utilizes our
asset allocation philosophy, which builds on the importance of financial asset
diversification, global equity diversification and inflation sensitivity.
“Financial assets, which include both risk control and risk assets, are
diversified to potentially reduce volatility and seek to protect against
downside market events. We employ these methodologies in a goals-based
framework called goals-driven investing (GDI),” the firm says.
Northern Trust’s portfolio managers then look at a five-year forecast for
economic activity and market returns. “Additionally, we consider a qualitative
lens where, each year, key themes emerge that we believe will affect the
economic and financial market landscape,” Northern Trust says.
The Focus Funds are also designed to take a participant through retirement,
Bailey says. According to the firm’s DC funding status white paper, that is up
to age 95. Northern Trust then “empirically encodes the federal tax code” into
its TDF model, to account for tax, Social Security and health care” into the
funds’ glidepath, Bailey says.
The Northern Trust Focus funds also “take lifecyle expenses into consideration
by relying on academic studies and economic research” into spending patterns in
retirement, Bailey says. Another key component is “human capital—but Northern
Trust looks at human capital in a different way than our competitors,” she
says. “We look at the present value of future savings in order to reach an individual’s
retirement goals. Imagine you are participating in your 401(k) plan and saving
$100 every two weeks. That is what we consider the human capital. It is a
bond-like investment because it is contributed on a regular basis. The
consistent savings allows you to take more risk in equities.
“As you get closer to retirement, the number of contributions will decrease, so
we offset that with an allocation to a bond-like portfolio that has more income
characteristics,” Bailey continues. “That drives our glidepath and goals-driven
investing. The whole concept is to move away from a risk/return framework to
look at the income the TDFs will provide.”
As Northern
Trust notes in its funding white paper: “The objective for any target date fund
should simply be to efficiently fund the retirement liability, enabling
participants to reach those goals—not to outperform an index, generate higher
total returns than other mangers or take unnecessary risk to grow assets in
excess of the liability.”
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ERI Scientific Beta Presents Long/Short Equity
Market Index; TD Ameritrade Offers Expanded Commission-Free
ETF Program; State
Street Global Advisors Launches New SPDR Portfolio ETFs; and more.
ERI Scientific Beta Presents Long/Short Equity Market
Index
ERI Scientific Beta
announced the launch of a long/short equity market neutral index, the Scientific
Beta Developed Multi-Beta Multi-Strategy Managed Volatility L/S Equity Market
Neutral Index (x3.5).
The objective of the
index is to seek exposure to long-term rewarded factors and a reduction in
non-rewarded risks, which associates the factor exposure with good
risk-adjusted performance, while at the same time aiming for market neutrality
within a universe of large and mid-capitalization companies from developed
countries. The allocation across smart factor indices is implemented with the
goal of minimizing the volatility of the long/short spread. Return
amplification is obtained by the use of 3.5x leverage, maintaining volatility
below 8%.
While long/short multi-factor
strategies will, by construction, harvest long-term factor premia, such
strategies may expose investors to unintended risks due to poor diversification.
This risk is all the greater in that long/short strategy providers seek to maximize
each factor’s spread through in-sample optimizations that lack robustness,
because the selected factor champions are not persistent out of sample. This
factor concentration also leads to highly unstable market beta, because the
factors naturally exhibit high levels of beta conditionality.
Commenting on the
launch, Noël Amenc, CEO of ERI Scientific Beta, says, “Scientific Beta’s long/short
offering corresponds to its investment philosophy: risk management, factor
diversification and top-down implementation. The portfolio construction
methodology prioritizes risk management, which guarantees the robustness of
out-of-sample performance. It diversifies across multiple factors to benefit
from low correlations across factors rather than concentration in factor
champions, which lack consistency and are a source of unstable performance and
high turnover. The long/short solution is implemented in a top-down manner to
allow dynamic allocation across factors, guarantee transparency and facilitate
the search for market beta neutrality.”
Scientific Beta
implements its long/short strategy through a short position in the cap-weighted
reference index and a quarterly allocation to sub-portfolios in the long leg
with the objective of minimizing the volatility of the long/short spread under
the constraint of factor exposure positivity, diversification across factor
indices and market beta neutrality. The long leg sub-portfolios are designed to
efficiently capture the long-run factor risk premia that have been documented as
being associated with factor tilts (value, momentum, low volatility, high
profitability, and low investment).
NEXT: TD Ameritrade Offers Expanded Commission-Free
ETF Program
TD Ameritrade announced an expansion of its commission-free exchange-traded funds (ETF)
trading program, tripling the number of ETFs to 296 from 100, effective October 17.
The firm contends it will offer the most commission-free ETFs in the industry, as
well as the largest selection of non-proprietary, commission-free ETFs.
Through the upgraded TD
Ameritrade commission-free ETF program, registered investment adviser (RIA) and
individual investor clients will have access to non-proprietary, low-cost ETFs
from eight providers, including AGFiQ QuantShares; First Trust Portfolios; iShares ETFs; J.P. Morgan Asset Management; PowerShares by Invesco; ProShares; State
Street Global Advisors; and WisdomTree.
TD Ameritrade will allow all of
its clients to buy and sell commission-free ETFs that cover 77 Morningstar
categories; provide increased sector and commodity coverage; and include
low-cost ETFs in 15 core investment strategies from State Street Global
Advisors’ SPDR Business.
“Clients asked us for greater
choice and a wider variety of high-quality, commission-free ETFs. We’re
delivering in a big way: we’ve assembled the largest list of commission-free
ETFs in the business, while still retaining our open-architecture approach,
with no proprietary ETFs,” says Jim Dario, managing director of product
management for TD Ameritrade Institutional. “The new platform will feature some
of the biggest names in the ETF
industry, with ETFs selected to cover a range of investment strategies and
enable investors and advisers to create tailored, diversified portfolios.”
NEXT: State Street Global
Advisors Launches New SPDR Portfolio ETFs
State
Street Global Advisors (SSGA) has announced the launch of SPDR Portfolio ETFs,
a suite of 15 ultra-low-cost ETFs that provide access to a wide range of equity
and fixed income asset classes to help investors meet their goals.
Comprising
15 existing funds, including three that will track new indices, and with over
$11 billion in existing assets under management, the SPDR Portfolio ETFs include:
New Name and Ticker
New Total Expense Ratio
SPDR
Portfolio Total Stock Market ETF (SPTM)
0.03%
SPDR
Portfolio Large Cap ETF (SPLG)
0.03%
SPDR
Portfolio Mid Cap ETF (SPMD)
0.05%
SPDR
Portfolio Small Cap ETF (SPSM)
0.05%
SPDR
Portfolio S&P 500® Growth ETF (SPYG)
0.04%
SPDR
Portfolio S&P 500 Value ETF (SPYV)
0.04%
SPDR
Portfolio S&P 500 High Dividend ETF (SPYD)
0.07%
SPDR
Portfolio World ex-US ETF (SPDW)
0.04%
SPDR
Portfolio Emerging Markets ETF (SPEM)
0.11%
"Each
fund in the SPDR Portfolio suite is priced equal to or below the lowest fee ETF
in the category," says Rory Tobin, co-head of the Global SPDR business at
SSGA. “Some of these changes in price are significant - such as offering
Emerging Markets exposure at 11 basis points. In addition, these funds have a
combined total of over $11 billion in assets and trade actively, so there is no
incubation period needed."
The
launch of SPDR Portfolio ETFs coincides with the launch of TD Ameritrade’s
newly expanded ETF Market Center. The 15 SPDR portfolio ETFs will all be
available to purchase commission free on TD Ameritrade’s ETF Market Center.
The
suite of SPDR Portfolio ETFs will provide investors access to a broad range of
asset classes to assist in the construction of a core portfolio strategy,
including fixed income, domestic equity, emerging market and international
equity.
SSGA
also announced changes to the names and tickers of the 15 ETFs now included in
the suite of SPDR Portfolio ETFs.
Coinciding
with the launch of the SPDR Portfolio ETF suite, SSGA is introducing three new
proprietary indices to provide investors with diversified exposure to the U.S.
large cap market, U.S. small cap market and the total U.S. equity market,
encompassing stocks of all market capitalizations. The following index changes are
effective November 16, 2017.
NEXT: Endowment Wealth Management Premieres “Unicorn” Fund
Endowment Wealth Management, Inc.
has announced the launch of its EWM Unicorn Technology Fund. The private fund
is seeking to raise up to $25 million to capitalize on what its management team
sees as opportunities in the secondary market for private, late-stage venture
capital technology companies. Such firms are often referred to as unicorns due
to their rarity and size.
The fund manager will seek to build a diversified
portfolio of companies that it believes may experience a liquidity event in the
next two to four years. The Unicorn Technology Fund is currently fully invested
across six such companies and the manager intends to add additional investments
as the fund grows.
"The Unicorn Technology Fund was created to leverage the
experience of the management team and knowledge in the venture capital and
secondary market space,” says Prateek Mehrotra, chief investment officer of
Endowment Wealth Management. “Late-stage venture capital investing
is not about seeking home runs- it's about capturing a bump in valuation that
can often occur when a firm is acquired or goes public. Such investing is not
without risk. We think that some of this risk can be mitigated by buying a
diversified portfolio of established companies, being selective, and by seeking
to acquire shares at prices discounted from the respective companies' last
round of financing.”
The Unicorn Technology Fund is available only for accredited
investors meeting certain income and net worth requirements.
NEXT: FS Investments Introduces
Open-End Mutual Fund
FS Investments has announced the launch of its first open-end
mutual fund, FS Multi-Strategy Alternatives Fund (Tickers:
FSMSX (Class I), FSMMX (Class A)). The
fund seeks to generate absolute returns with low correlation to traditional
investments over a complete market cycle, and combines hedge fund managers and
alternative beta strategies.
"FS Investments always
looks for differentiated ways to help investors access alternative sources of
returns," says Michael
Forman, chairman and chief executive officer of FS
Investments. "FS Multi-Strategy Alternatives Fund was created to provide
exposure to an investment approach employed by some of the most successful
institutional investors. We are excited to bring this solution to the
broader investing public and do so in a daily liquid, transparent fund."
FS Multi-Strategy Alternatives
Fund uses a hybrid investment approach, linking traditional hedge fund managers
that can provide the potential for skill-based outperformance with beta
strategies that seek to capture alternative sources of return across asset
classes.
FS Investments has selected
Wilshire Associates Incorporated as the fund's primary sub-adviser.
"This hybrid approach has redefined what a core
alternatives allocation should be," says Greg
Bassuk, head of Liquid Alternative Strategies at FS
Investments. "With this new fund, FS Investments provides a single
fund solution that leverages Wilshire's leading hedge fund and
alternative beta due diligence, asset allocation, rebalancing and risk
management capabilities with FS Investments' expertise in thoughtfully
designing and delivering an institutional-quality product to individual
investors."
For further information regarding the fund please visit here.
NEXT: Vanguard Selects
Wellington to Manage Global Balanced Funds
Vanguard has launched two actively managed global balanced funds:
Global Wellington Fund and Global Wellesley Income Fund, and has appointed
long-time investment advisory partner Wellington Management Company LLP to
manage the new funds.
Global Wellington Fund will seek to provide long-term capital
appreciation and moderate current income by offering a globally diversified
portfolio invested in both equities and fixed income securities. The Global
Wellington Fund will have approximately 65% of assets invested in U.S. and
non-U.S. equities and 35% of assets invested in U.S. and non-U.S. fixed income
securities. The Global Wellesley Income Fund will take a more conservative
approach in primary pursuit of a high and sustainable level of current income,
along with moderate long-term capital appreciation. Approximately 65% of its portfolio
will be allocated to U.S. and non-U.S. fixed income securities and 35% to U.S.
and non-U.S. equities.
“We will adhere to the same long-term, disciplined, balanced
approach that has served Wellington and Wellesley fund shareholders well over
decades, with the additional diversification benefits of global exposure,” says John Keogh, portfolio manager for the fixed income portions of the new global
funds. “In our stock selection, we will focus on high-quality global companies
with attractive valuations; in our bond approach, we will emphasize
high-quality global corporate and government debt.”
Global Wellington Fund offers Investor Shares with an estimated
expense ratio of 0.45%, and Admiral Shares with an estimated expense ratio of
0.35%. Global Wellesley Income Fund offers Investor Shares with an estimated
expense ratio of 0.42%, and Admiral Shares with an estimated expense ratio of
0.32%. Both funds have a minimum initial investment requirement of $3,000 for
Investor Shares and $50,000 for the Admiral Shares. The initial subscription
period for the new funds will run from October 18, 2017 through November 1,
2017.
NEXT:
Orion Partners with Asset Management Firms to Deliver Community Marketplace
Orion Advisor Services has
announced Orion Communities, an
interactive peer-to-peer exchange that allows Orion clients utilizing its “Eclipse”
trading platform, along with other strategists, to share model portfolios with
each other in an open-source platform.
Orion has partnered with asset management firms Russell Investments, BlackRock, and CLS Investments,
which will share their own models, portfolio building tools, market updates and
commentaries with the Orion adviser community, with many being offered at zero
charge for Orion clients on its “Eclipse” platform.
“In a dynamic market, it is
important for advisers to work together to offer the best possible investment
solutions for their clients, and we recognized the market demand for a platform
like Communities,” says Todd Clarke, managing director, NorthStar
Financial Services Group, LLC, parent company to Orion. “With
Communities, Orion is making it easier for advisers to access and leverage each
other’s expertise, helping them diversify their practices and serve clients
more efficiently.”
The trade review and execution is
completed by each strategist firm, in accordance with existing trading
processes. When a strategist shares it models on Communities, it uploads
its agreement to the platform. The subscribing adviser interested in the
models then signs off on the agreement and payment terms. Orion’s system helps
support payments, but the strategists are responsible for negotiating the terms
and exchange of payments.
Tax loss harvesting and asset
location will continue to be optimized in Orion’s “Eclipse,” the firm’s platform which helps enable
advisers to trade and rebalance portfolios in a tax efficient manner.
For more information about Orion Communities, please sign up
for an informational webinar here.