New research examining custom target date funds from 2017-2018 finds that overall median allocations between the two years were very stable, with few changes observed.
Overall, the allocation to growth versus defensive assets varied within vintage by less than 3 percentage points, according to the study by the Defined Contribution Institutional Investment Association’s (DCIIA) Retirement Research Center.
DCIIA’s custom TDF report is an update of last year’s inaugural survey. For the first DCIIA study, nine asset allocators provided allocations of the custom TDFs they managed as of year-end 2017. In the current study representative of year-end 2018 data, 14 asset allocators participated, with the number of plans increasing from 65 to 91 and the number of unique funds increasing from 673 to 958.
When DCIIA examined year-end 2018 data at the plan level, the researchers saw wide ranges of allocations within vintages and asset categories. This, according to the report, suggests that asset allocators and individual plan sponsors had different views of the ideal glide path for each vintage, with asset allocations varying by as much as 30 percentage points.
Median performance across all vintages rose over 18% in 2017, yet fell over 6% in 2018 as a result of exceptionally different market environments. Moreover, relative to other comparable vintages, the superior performers in 2017 also tended to lag in 2018, driven by different growth exposure, illustrating the need to measure performance over longer time horizons, DCIIA further observes.
Equity Allocations
At the high end of exposure, 95th percentile equity allocations ranged from 95% for 2045-2060 funds to 42% for the income funds. The 5th percentile equity allocations ranged in a similar style, from 74% for the 2060 funds to 18% for the income funds, the report shows. Additionally, the spread in median allocations to equity ranged from 88% for the 2060 funds to 29% for the income funds. Differences between the 95th and 5th percentiles for later-dated funds were not significant and peaked at 34 percentage points for the 2020 vintage.
The top five equity asset classes by prevalence for year-end 2018 were:
- U.S. large-cap equity (91%)
- Non-US developed equity (62%)
- Emerging market equity (59%)
- U.S. small-cap equity (58%)
- U.S. small- and mid-cap equity (29%)
U.S. mid-cap and global equity were prevalent in 21% of custom TDF strategies, while the remaining five equity asset classes each had less than 20% prevalence among plans, the report further observes.
In comparing 2017 and 2018 year-end data, the prevalence of U.S. large-cap and U.S. small-cap was higher in 2018, but the prevalence of non-U.S.-developed and emerging market was lower. The report notes that global and U.S. mid-cap emerged in 2018, after not being prevalent in 2017, while the prevalence of global ex-U.S. fell from 22% in 2017 to 18% in 2018.
Fixed-Income Allocations
At the low end of exposure, DCIIA notes that the 5th percentile fixed-income allocations ranged from 37% for income funds to 1% for 2050-2060 funds. Similarly, the 95th percentile fixed-income allocations ranged from 69% for income funds to 13% for 2060 funds. The average allocation to fixed income for income funds was 52%, declining to 7% for the 2060 fund. Differences between the 95th and 5th percentiles varied little for later-dated funds and peaked at 36 percentage points for the 2020 vintage, the study observes.
The top five fixed-income asset classes by prevalence were:
- Core U.S. bond (97%)
- Short-duration bond (42%)
- High-yield/high-income bond (40%)
- Cash (26%)
- Stable value/guaranteed (22%)
Looking at all 14 asset allocators that reported in 2018, versus all nine asset allocators that reported in 2107, the authors note that they see greater prevalence in 2018 for core U.S. bonds, high-yield/high-income bond and stable value/guaranteed. What’s more, they observe that prevalence fell in 2018 for short duration bond, cash and emerging market bond.
Inflation-Sensitive Allocations
At the low end of exposure, 5th percentile inflation-sensitive allocations ranged from 2% for 2035-2060 funds to 8% for 2015, while the 95th percentile ranged from 38% for 2015 funds to 17% for 2040 funds, the research shows. The average allocation to the inflation-sensitive category for 2015 funds was 18%, declining to 6% for both the 2050 and 2060 funds.
The top five inflation-sensitive asset classes in 2018 by prevalence were TIPS bond (81%), commodities (38%), global REITs (37%), real estate (public/U.S. REITs) (24%), real assets (21%) and real estate (private/direct) (11%).
Diversifier Allocations
Finally, the 5th percentile allocations for diversifier assets were relatively consistent across vintages, showing little range—around 0% to 2%, the report notes. The allocations to diversifier assets, however, varied in the 95th percentile from 46% for income to 17% in the 2015 and 2020 funds. “The average allocation to diversifiers was 1% to 2% across all vintages, but this percentage alone does not capture the high end of the allocations represented by the 95th percentile,” the report observes.
The top seven diversifier asset classes by prevalence for all 14 respondents observed in 2018 were bank loans (3%), hedge funds (2%), GTAA (2%), private equity (1%), risk parity (1%), structured securities (1%), and U.S. balanced (1%).
Contributors to the report included Chris Nikolich with AB, Joshua Dietch with T. Rowe Price, along with Warren Cormier and Amanda McCormick of DCIIA’s Retirement Research Center.
