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June 18, 2012 01:00 AM

Callan: Inflation-sensitive assets take hold in target-date funds

Kevin Olsen
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    About two-thirds of target-date fund managers surveyed by Callan Associates have modified their funds’ glidepaths in the last year, largely regarding inflation-sensitive assets.

    While managers were “dipping their toes” into inflation-sensitive assets in recent years, “it’s becoming much more pronounced,” said Lori Lucas, executive vice president and DC practice leader at Callan.

    About 37% of target-date funds increased their inflation-sensitive exposure in their glidepaths in the last year. The second-largest change was 16.7% of funds improved their international equity diversification.

    “It’s really all about tail risk,” Ms. Lucas said.

    Nearly 87% of target-date funds offer a stand-alone allocation to TIPS in their glidepath with an average allocation within the fund of 7.9%, both are highs in Callan’s survey for non-traditional asset classes. About 77% of target-date funds offer stand-alone emerging markets equity, up from 60% last year. Other asset classes such as high yield, REITs, international/global fixed income and commodities have all figured more prominently within target-date funds, Ms. Lucas said.

    Target-date funds have “evolved extremely quickly, and not just in terms of asset allocation … rebalancing strategies are more sophisticated,” Ms. Lucas said in a telephone interview. “Conversely, we’ve been hearing how prevalent alternatives are … and yet they’re not quite as prevalent as the buzz might suggest.”

    Alternatives, such as absolute return and hedge funds, are offered as a stand-alone allocation in only 20% of funds, with an average 1.3% allocation within the target-date fund. However, that number is skewed by the fact that one fund has a 59.6% allocation to alternatives.

    Only 7% of respondents reported changing their overall ratio of equity to fixed income.

    The latest survey covered 33 fund managers providing 40 separate target-date fund series with aggregate assets of $464 billion.

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