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Delegates at the RP Forum learned about the benefits of target retirement funds from Vanguard Asset Management investment strategist Todd Schlanger. RP followed up with him after the event…
Has a static balanced 60-40 equity/fixed-income portfolio outlived its usefulness for retirement investors? Why the glide path?
No, not all investors have the same needs and preferences. The 60-40 equity/bond portfolio is the most popular of Vanguard’s LifeStrategy Funds in the UK. The big difference between a balanced portfolio like a 60/40 portfolio and target retirement funds (TRFs) is that the balanced portfolios assume a constant risk profile, when in reality an investor’s risk tolerance may change over time and warrant a different asset allocation as reflected in the TRF glide path.
Investors or advisers using static allocation funds for their retirement savings will need to monitor their portfolios to ensure the asset mix and risk profile remain suitable as an investor ages and they approach and settle into retirement. The advantage of using TRFs is that changes in asset allocation and risk profile happen automatically for investors within the fund. Experienced investment professionals are managing the portfolio to make sure investors have an appropriate mix of assets for their stage in life; younger investors can take on more risk because of the long-term investment horizon, while older investors need to be more conservative.
What are the differences between your US and UK offerings? Are US and UK savers very different?
Our UK TRFs have been created specifically for UK investors while leveraging our experience as the US’s largest provider of target date funds (TDFs). In fact, the mainstream nature of TDFs is a big difference between US and UK retirement markets. In the US, TDFs are often the default investment option among defined contribution schemes, while they are relatively new here in the UK.
For our UK TRFs, we spoke with UK-based consultants, advisers and investors to understand the local needs and preferences of UK investors and these views helped shape the fund’s investment strategy.
There are some differences between our US and UK TRFs. For example, we found a higher level of risk aversion among UK investors, so we have a slightly lower equity allocation for younger investors compared with the US funds. It’s 80% for the UK and 90% for the US. We also have a longer investment horizon to match up with the UK state retirement age of 68, relative to 65 for the US funds. However, while there are some differences that respect the different investor characteristics, they share the same investment methodology and principles of being long-term, broadly diversified, global portfolios created from low-cost index funds. We consider the funds globally consistent with local relevance.
How important is governance in Vanguard’s target retirement funds?
We take the oversight of the funds very seriously. We describe our approach as constant debate, not constant change. It’s not purely an academic exercise but rather a holistic approach incorporating best practices in portfolio construction, ongoing research into investment topics, and the practicality of the solutions for everyday retirement investors.
Any changes that occur to the funds over time come from our Strategic Asset Allocation committee, which provides global consistency to all of the single-fund solutions Vanguard manages. This committee discusses and debates research from our Investment Strategy Group, our Centre for Retirement Research and takes input from our Strategic Retirement Consulting teams on an ongoing basis.
The oversight process also involves our most senior business leaders on the Global Investment Committee and our board of directors at Vanguard. This structure has the benefit of embedding stability in our approach.
Our portfolio managers ultimately are responsible for execution, including daily rebalancing, for the underlying funds and the TRFs themselves. And we have our Portfolio Review Department that is responsible for overseeing all of this activity on an ongoing basis and stitching together the various groups in the context of product management.
You said changes to the fund were only made when necessary, can you give some examples of changes that have been made and explain why?
There have been a few, but not many, changes in our US TRFs, which we launched in 1993. In fact, as a result, Morningstar has given us a high “stability score”. There are a few consistent themes with the changes we have made: increasing levels of diversification and increasing simplicity and/or lower costs.
The most recent change in early 2015 decreased the funds’ home bias, by increasing the international allocations by 10% in both equities and bonds. And a few years before that, we changed the fixed income portions of the funds. We added international bond exposure to improve diversification, and we eliminated money market exposure and reallocated to other areas of fixed income. Again these changes were designed to increase diversification with the aim of improving investor outcomes.
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