Managers refine glidepaths for a smoother ride

Managers are continuing to refine their strategies for target date funds, with more than a third of managers incorporating a tactical overlay into their asset allocation, a recent survey has revealed.

Global asset consultant Callan Associates’ 2011 survey of 26 target date funds managers with more than $375 billion under management found that while 8o per cent said their fund’s asset allocation was strategic in nature, 37 per cent now used a strategic with tactical overlay approach.

This was up from 24 per cent who said they used a similar strategic/tactical overlay approach last year. The majority of managers (51.9 per cent) said they still considered their approach as purely strategic, down from 64 per cent the previous year.

Callan defined contribution practice leader, Lori Lucas, said target date managers were increasingly looking for flexibility in their approach so they could respond to volatile market conditions.

The survey also looked at glidepath design, finding substantial changes to the structure of funds’ glidepaths were uncommon. But managers were evaluating the glidepaths more frequently and as result making more incremental changes.

While half of managers conducted annual glidepath evaluations, monthly evaluations were rising.

Nearly 14 per cent of managers now conducted monthly evaluations, up from just 3.3 per cent the year before. While this year, 13.6 per cent of managers will conduct quarterly evaluations down from 23.3 per cent in 2009.

The greater focus on glidepaths had resulted in the majority (58.3 per cent) of managers changing their allocation after their most recent evaluation, up from 34 per cent the previous year.

While typically small changes, the most noteworthy adjustments involved incorporating inflation-sensitive assets, with the majority maintaining exposure to a combination of TIPS, US REITs, international and global REITs, commodities and diversified real estate.

“Allocations to inflation sensitive securities and other diversifiers remain generally modest,” Lucas said.

“Often the target date managers are just dipping their toes in the water when it comes to commodities and alternatives and even REITs and TIPs allocations tend to be small.”

Lucas said that despite the pre-financial crisis view of target-date-funds as being generally fairly similar and commoditised there were, in fact, substantial differences in glidepath design and overall performance.

The survey found the rate of decline in total equity exposure as the member ages differed greatly across target dated funds, while asset management strategies and asset allocations also varied markedly.

More than 62 per cent of target date strategies represented in the survey were actively managed, 20 per cent were passively managed and 17 per cent were hybrid.

Of those funds surveyed 65.7 per cent managed their glidepaths through a 65-year retirement age, while the remainder managed to retirement.

Nor was it the case that funds that were managed to retirement were necessarily more conservative than those that continued to scale back equity exposure as the retiree aged.

The survey found there was a on average a “through” fund had 13 per cent more exposure to equities than a “to” fund by age 65. But by the time the retiree was 75 the continuing roll down in equity exposure led to an on average more conservative approach for a “through” fund as the retiree entered their twilight years.

“So it’s more than ‘to’ versus ‘through’ – it’s about conservative versus aggressive glidepaths,” Lucas said.

Despite increasing discussion around annuity products none of the TDF managers surveyed had included these into their glidepath funds, and only 16 per cent were looking at annuity-type solutions for the future.