Some target-date funds are boosting equities

Providers are changing glidepath components as participants show higher risk tolerances

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John Miller said PIMCO raised its equity allocation for the first time due to a forecast of lower volatility.

Several target-date fund providers raised the equity components of their glidepaths, saying their research shows participants have a slightly higher risk tolerance than in the years immediately after the economic crisis.

Although executives at the firms acknowledge they're not counting on equities to continue to match the annual gains of the recent bull market, they say a higher equity component is justified by a forecast of more economic stability and slightly less risk to equities. Just as important, they add, are results of internal research on participants' investing behavior and attitudes.

Firms increasing equities in their glidepaths include BlackRock (BLK) Inc. (BLK), New York; Fidelity Investments, Boston; Pacific Investment Management Co., Newport Beach, Calif., and J.P. Morgan Asset Management (JPM), New York.

These glidepath adjustments underscore the different strategies among target-date fund families. One example is the equity allocation for the various funds whose participants are at or closest to retirement. The revised equity components are 40% for BlackRock; 54.9% for Fidelity; 20% for PIMCO; and 36% for J.P. Morgan Asset Management.

BlackRock's new glidepath for its LifePath series will take effect this fall for its collective trusts and next summer for its mutual funds, said Chip Castille, managing director and head of the U.S. retirement group. This is the first change to the equity allocation since 2001.

BlackRock is raising the equity allocation to 40% from 38% at the landing point (when a person retires and the equity-to-fixed-income ratio remains unchanged throughout retirement).

Equity allocations also are being adjusted throughout the LifePath series, with the largest percentage-point increases coming in funds catering to people 20 to 30 years away from retirement. For example, for a person 25 years from retirement, the new glidepath will have about a 94% equity allocation vs. 78%.

These bigger equity increases for longer-dated funds reflect “the longer investment horizon for younger investors,” Mr. Castille said.

The glidepath revision was based in part on studying consumers' savings behavior and asset-allocation levels. “That's driving our decision more than equity markets,” he said.

Mr. Castille said BlackRock's glidepath review also takes into account 10-year capital market assumptions, but he didn't provide details on BlackRock's forecast. Asked if the glidepath change was influenced by the rising stock market in recent years, Mr. Castille said: “Our forecasting process is looking ahead — not looking behind.”

Fidelity changes

Fidelity Investments changed the glidepath for its Freedom Fund series this way: Before, the equity component of a target-date fund for a participant with 40 years until retirement started at 90%, and then dropped steadily over time. Now, the 90% equity allocation remains the same for about 20 years and then declines steadily.

Fidelity offered a more detailed example for its Fidelity Freedom 2020 fund. The previous equity targets had been 39% domestic equity and 14% international equity. The new targets are 43% domestic equity and 18% international equity. For the fund catering to people at retirement, the equity allocation was raised to 54.9% from 49.7%.

Fidelity's glidepath review takes into account three factors — participant behavior, capital market assumptions and participants' risk tolerance, each of which “is reviewed on a regular basis,” said Andrew Dierdorf, co-manager of the Freedom series of funds.

The capital market assumptions, for example, are “reviewed and updated formally” each year, but they “can be updated more frequently if necessary,” he said. This was Fidelity's first equity allocation addition to the glidepath since 2006.

Over a 20-year period, Fidelity forecasts 6% to 7% annualized equity returns on a real-return basis. The projected real returns for bonds and cash “are more muted” compared with the last 20 years, Mr. Dierdorf said.

PIMCO raised the equity allocation in its RealRetirement series by 5 percentage points for some funds and 7 percentage points for others. The equity allocation at the landing point for retirement is now 20%, up from 15%. For the 2050 fund, the equity allocation is now 62.5%, up from 55%.

According to a March 31 research report by Morningstar Inc., Chicago, the PIMCO target-date series has a lower-than-average equity allocation than its peers.

Among the target-date fund providers mentioned, PIMCO is best known for its emphasis on fixed-income management whereas the others historically have managed both equities and fixed income.

“Historically, PIMCO has been on the lower side of equity allocations compared to other target-date fund families,” said John Miller, managing director and head of PIMCO's U.S. retirement business.

This is the first time the firm has changed the equity allocation of its glidepath since it began offering target-date funds in early 2008, said Mr. Miller, adding that PIMCO conducts a glidepath review annually.

PIMCO raised its equity allocation to reflect a forecast of lower volatility, he said. Boosting the equity component meant PIMCO reduced its exposure to real assets — commodities, real estate investment trusts and Treasury inflation-protected securities. (Morningstar said PIMCO traditionally has had a higher-than-average allocation to real assets.)

Mr. Miller said real assets' role in the glidepath was reduced by 5-7 percentage points, depending on the target-date fund year. For example, those assets now represent a 30% allocation at the retirement landing point rather than 35%. For the 2050 fund, they now account for a 25% allocation vs. the previous 32.5% allocation. “We still deeply embrace real assets,” Mr. Miller said.

J.P. Morgan Asset Management (JPM)'s new look for the glidepath in its SmartRetirement series features the smallest changes among the four managers.

The equity allocation for its Income Fund — the landing-point fund — was raised to 36% from 33% and for the 2040 fund, it was changed to 86% from 85%. This was the first equity allocation change to the glidepath since 2007. The firm conducts a glidepath review annually. n

This article originally appeared in the August 18, 2014 print issue as, "Some target-date funds are boosting equities".