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Special report: Target-date funds

European firms offer ways to fight specter of volatility

Alistair Byrne said SSgA has begun using defensive equities as part of its target-date series.

Money managers continue to work with European plan sponsors to deploy more adequate asset mixes to help them adapt target-date funds to the changing needs of plan participants.

The management of market volatility has come to the forefront of plan sponsors' requirements as they grapple with achieving retirement objectives for increasingly diverse groups of employees.

Target-date fund providers have taken a variety approaches in the past two years to meet the contrasting needs of different age cohorts within the same organizations. Some managers made adjustments to the glidepath designed for participants approaching retirement. By incorporating defensive equity and debt, they have moved away from relaying on factor investing only. Other providers are working on new offerings that reach beyond the age element.

Paris-based Amundi is among those firms examining how to best use target-date funds to address these differing needs.

For example, this year in "the German market we are working with plan sponsors to come up with a specific glidepath for women," said Delphine Di Pizio-Tiger, Amundi's head of employee savings and retirement management. Due to the gender pay gap, in some industries in Germany women are paid less and "we are developing a strategy that will help them not be disadvantaged when it comes to retirement outcome," Ms. Di Pizio- Tiger said.

In Europe more broadly, the desire for tailored strategies is sustaining the demand for target-date funds. Amundi, which manages target-date funds for corporations in France, Germany, Portugal, Spain, Luxembourg and the Netherlands, has bet on thematic investing. Ms. Di Pizio-Tiger said the firm invested in stocks linked to global issues associated with aging populations.

Amundi has €5 billion ($6 billion) in target-date funds.

Some target-date fund managers see making a switch to defensive equity as a more appropriate glidepath adjustment for older participants.

Alistair Byrne, head of European DC investment strategy at State Street Global Advisors in London, said the firm has moved to defensive equity in its target-date funds.

In the past 18 months the firm added smart-beta equities in its target-date funds. "We use return-focused factors in the growth phase, such as value and size, and more defensive factors closer to retirement," Mr. Byrne said. "We have also added emerging market debt and high-yield bonds to our (U.K.) funds' allocation."

In the U.K. multifactor investing has dominated lifecycle strategies in the past five years, and target-date fund managers branched out to enhance their equity strategies in efforts to capitalize on the risk that plan participants could be taking.

"For younger generations we tend to use value (factors), which tend to work better in the long term, while for older generations we tend to use factors that offer dividend and regular (cash flow). We usually find these qualities in low-volatility stock," said David Hutchins, senior vice president and lead portfolio manager, multiasset solutions, Europe, Middle East and Africa at AllianceBernstein (AB) in London. AB Retirement Fund 2053-2055 returned 12.22% annually compared to AB Retirement Fund 2035-2037's 11.61% over a three-year period as of Dec. 31. AB manages $3 billion in target-date funds in the U.K.

Brian Henderson, partner, director of DC consulting at Mercer LLC in Edinburgh, said consultants there are focusing on standard core growth factors, and are agnostic about value over other factors. "Over the last five years we seen a double-digit return in core growth funds,"Mr. Henderson said.