Callan Survey: Managers Shift Thinking on Target Date Fund Management Approach

SAN FRANCISCO--(BUSINESS WIRE)--In Callan’s 2011 Target Date Fund Survey: The Evolving Target Date Fund, it is clear that target date funds (TDFs) continue to evolve as managers evaluate their glidepaths and the use of underlying funds. In March 2011, Callan surveyed 26 target date fund managers representing $375 billion and 35 unique target date series to get their take on management approaches, glidepath design and anticipated changes.

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

While the majority of respondents (89%) said their funds’ asset allocations are strategic in nature¹ and substantial changes to their glidepath structures uncommon, more managers are increasingly incorporating a tactical overlay and deviating from the stated strategic asset allocation. Thirty-seven percent of managers signaled they now use the strategic with tactical overlay approach, compared with 24% in 2009. The majority of managers (51.9%) still consider their approach purely strategic—a big drop from 64% in 2009.

“Target date managers’ desire for flexibility in their management approach is no doubt a result of the bruising many of them experienced in 2008-2009 as they rigorously rebalanced during increasingly poor market conditions,” says Lori Lucas, defined contribution practice leader at Callan. “They are looking for some leeway to respond to volatile market conditions.”

The survey also determined that glidepath evaluations have become more frequent. While annual glidepath evaluations remain the most common with managers, at 50%, monthly evaluations are rising. Nearly one in five managers (18.2%) now conduct monthly evaluations, a considerable rise from 3.3% in 2009. Conversely, this year, 13.6% of managers will perform quarterly evaluations, a drop from 23.3% in 2009.

Callan’s research also shows that a majority of managers (58.3%) changed their glidepath as a result of their most recent evaluation—a significant jump from the 34.5% reported in 2009. Spurred by inflation concerns, the most noteworthy change involved the incorporation of inflation-sensitive assets into the glidepath fund lineup—with the majority maintaining exposure to a combination of TIPS, U.S. REITs, international and global REITs, commodities and/or diversified real estate.

Another popular adjustment involved diversification within asset classes and steps to reduce volatility. This includes the addition of, or increase in, international or emerging markets exposure—with several firms increasing their international equity exposure at the expense of domestic equity. Within fixed-income, notable additions include mortgage funds, global bonds, and senior loans as a strategic allocation.

Lucas says it’s important to observe that while glidepath adjustments are happening more frequently, they tend to be on the margin.

“Allocations to inflation sensitive securities and other diversifiers remain generally modest,” she said. “Often the target date managers are just dipping their toes in the water when it comes to commodities and alternatives; even REITs and TIPS allocations tend to be small.”

According to Callan, 62.9% of the target date strategies represented in the survey are actively managed, 20% are passively managed and 17% are hybrid (a mix of active and passive). Funds also vary widely by glidepath design and the pace of the decline in total equity exposure (equity roll down) as the investor ages. Across the universe, 65.7% of survey respondents advised that their glidepaths are managed through age 65 retirement, while the remainder are managed to the retirement age of 65.

Lucas advised that debate continues on what is the best approach. But while the key question tends to be whether a glidepath fund should be managed to a fixed retirement age or to one with a longer time horizon, the data suggests it is more complicated than that.

“Just because the glidepath becomes static at age 65, doesn’t mean it is automatically more conservative than a glidepath that continues in retirement,” said Lucas. “There are 2010 TDFs with nearly 50% in equities at age 65 retirement and through 2010 TDFs with less than 30% in equities. So it’s more than to versus through—it’s about conservative versus aggressive glidepaths.”

With respect to the use of in-plan annuities, none of the TDF managers surveyed had incorporated these into their glidepath funds, and only 16% were considering annuity-type solutions for the future. This suggests that despite the fanfare around retirement income solutions, managers recognize that their acceptance of annuities in TDFs is still lacking.

Note:

1. Managed for the long-term.

About Callan Associates

Founded in 1973, Callan Associates is one of the largest independently-owned investment consulting firms in the country. Headquartered in San Francisco, Calif., the firm provides research, education, decision support and advice to a broad array of institutional investors through four distinct lines of business: Fund Sponsor Consulting, Independent Adviser Group, Institutional Consulting Group, and the Trust Advisory Group. Callan employs more than 155 people and maintains four regional offices located in Denver, Chicago, Atlanta and Florham Park, NJ. For more information, visit www.callan.com.