Managers are diversifying their holdings to protect against a
downturn, even as some add more stocks
By Michael A. Pollock
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (February 5, 2018).
Many target-date funds face a challenge in this long bull market
for stocks: Their high exposure to equities could result in a sharp
drop in their value during a major stock-market pullback.
To damp the possible impact of such a downturn, managers of many
of these funds are diversifying into new types of investments --
even as some also boost their stock exposure in hopes of getting
better long-term returns and keeping up with competitors.
For example, BlackRock Inc., among the largest providers of
target-date funds, with assets of more than $200 billion in them
globally, recently recast one of its three fund series with higher
equity exposure and investments in smart-beta exchange-traded funds
-- index-tracking funds that are designed to both boost returns and
lower risk by using factors other than the traditional market
capitalization to create their portfolio. John Hancock is
diversifying its target-date funds' holdings with a modest
allocation to alternatives to stocks and bonds, such as currency
derivatives. And investors in TIAA's target-date funds now own a
portion of actual buildings -- not just shares in real-estate
investment trusts -- such as a 24-story luxury condo structure near
New York City's Madison Square Park.
Because some of these strategies are relatively new, it's
uncertain how well they will bolster fund performance in another
market downdraft, says Jeff Holt, who helps oversee manager
research at fund tracker Morningstar. In 2008-09, the most
equity-heavy target-date funds shed more than 30% of their value
before eventually recovering.
Today, more working people than ever own target-date funds
through employer-sponsored 401(k) plans or other tax-deferred
accounts. These funds start with very high equity exposure when
their investors are presumed to be relatively young and slowly
shift toward more-conservative investments as they get closer to
retirement -- known as the equity glide path. U.S. target-date
assets are approaching $1 trillion.
The need for stock risk
With life expectancies increasing and future returns in many
asset areas projected to be lower than they have been in recent
years, investors need more equity risk to save enough for
retirement, says Fredrik Axsater, a senior executive at Wells Fargo
Asset Management. Last year, the firm overhauled its flagship
target-date funds, lifting the stock allocation modestly for
investors approaching retirement and adding smart-beta ETFs that
focus on factors such as valuations, price momentum, volatility and
measures of financial health to determine the weightings of their
investments.
Because many smart-beta ETFs focus on a relatively narrow slice
of the stock market, they can make it easier for managers of
target-date funds to tweak strategy in response to shifting market
conditions by buying or selling them. And because the ETFs' fees
are low, Wells Fargo has been able to trim the expense ratios on
its target-date funds to 0.19% of assets annually from a range of
0.30% to 0.37%.
BlackRock made some similar changes. The equity glide path for
its LifePath funds, which had started to decline almost immediately
from initial stockholdings in the high 90% area, now hovers around
99% for more than the first decade of an investor's participation.
That doesn't materially boost risk and significantly improves
returns, says Matthew O'Hara, global head of investments for the
LifePath funds.
BlackRock also revamped one of its three target-date series to
put up to 90% of portfolios into smart-beta ETFs such as iShares
Edge MSCI Min Vol EAFE (EFAV) and iShares Edge MSCI Min Vol USA
(USMV). That enabled it to lower expense ratios to 0.21% to 0.22%,
about half that of its actively managed target-date series.
Northern Trust Asset Management in 2016 lifted the peak equity
exposure of its target-date funds by 5 percentage points to 85%.
But unlike most peers, its funds start in the low 80% area and
don't hit peak stock allocation until a hypothetical investor
reaches age 45, about the point when stock exposure starts
declining again. That's to trim volatility early on, when people
with smaller balances may be more inclined to cash out, says
Sabrina Bailey, the firm's global head of retirement solutions. The
firm further diversifies by putting some assets into markets that
don't closely track stocks, such as commodities and global real
estate.
Changes in tools
While it hasn't changed its equity glide path, Principal
Financial Group, based in Des Moines, Iowa, recently made portfolio
shifts intended to boost returns and damp volatility. Its
target-date portfolios, which invest in other individual mutual
funds, modestly increased their holdings in non-U.S. stock funds.
Some also added a fund that focuses on less volatile,
dividend-paying stocks, a move that managers hope will "minimize a
little of the downside" during any market corrections, says
portfolio manager Randy Welch.
John Hancock's Multimanager Lifetime funds, which also use a
fund-of-funds approach, try to steady the ride by shifting to more
defensive stocks as the target retirement date grows near. Some of
its target-date funds hold as much as a fifth of their portfolios
in stock mutual funds that tend to be less volatile than the broad
market, in part because they invest in dividend-paying companies
with strong financial profiles.
The Multimanager Lifetime funds also have a modest allocation to
alternative investments, including funds that wager on gyrations in
the global currency market or use various strategies to try to
generate gains regardless of how broad asset classes perform.
Portfolio manager Nathan Thooft says the allocation to alternatives
totals around 4% to 5%.
Real estate for retirement
TIAA has taken an unorthodox step in its Lifecycle target-date
offerings: putting some fund money into the ownership of buildings.
It began doing that in mid-2016 and eventually expects such
holdings to represent about 5% of portfolios.
Although its target-date offerings already had real-estate
exposure through holdings of real-estate investment trusts, TIAA
tapped into a $100 billion global real-estate fund managed by one
of its affiliates to invest directly in properties, says John
Cunniff, who oversees two target-date series. "Having a
diversifying asset like real estate could be a great benefit during
a full market cycle" for stocks, Mr. Cunniff says.
Mr. Pollock is a writer in Ridgewood, N.J. He can be reached at
reports@wsj.com.
(END) Dow Jones Newswires
February 05, 2018 02:47 ET (07:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
Wells Fargo (NYSE:WFC)
Historical Stock Chart
From Mar 2024 to Apr 2024
Wells Fargo (NYSE:WFC)
Historical Stock Chart
From Apr 2023 to Apr 2024