The Target Date Strategies aim to produce inflation-adjusted income for plan members in retirement. Rather than focusing on accumulating a lump sum by the retirement date, these strategies employ an extended glide path that continues to evolve throughout a member’s retirement years, which is critical for plan members who prefer a “hands off” approach to managing their retirement savings.
Distinguishing features include:
- Retirement income focus: These strategies seek to provide plan members with an inflation-adjusted income stream throughout 25 years of retirement.
- Extended time horizon and unique glide path: The strategies assume evolving savings and income objectives throughout working life and 25 years beyond the retirement date. Accordingly, the asset mix of the glide path continues to evolve throughout the retirement period.
- Innovative approach: The strategies follow a well-researched asset allocation glide path, which is a dynamic investment strategy that automatically “ages” with the plan member over time, based on certain assumptions about risk tolerance and income needs. While similar investment solutions also use a glide path, our approach of considering plan member assets alongside their expected retirement liabilities is both innovative and distinctive.
Investment philosophy and style
- We take a conservative and disciplined approach to investing that aims to provide consistent added value to clients’ portfolios while controlling risk.
The key objectives and features of our approach to target-date investing are described below.
Each target date strategy remains active through the working years and for 25 years after the plan member’s retirement date. The evolving asset mix supports income withdrawal well into the member’s retirement years. This also allows the strategies to incorporate asset classes that directly address the changing needs and risks of investors through the phases of the lifecycle.
Providing inflation-adjusted income
Our target date strategies aim to lessen the impact of inflation on long-term savings by:
- including a high allocation to inflation-linked bonds in the earlier phases of the investment timeline when investors are most exposed to the impact of inflation;
- matching the sensitivity to inflation of the fixed income holdings with future retirement income needs, accomplished via long duration bonds in early years and shorter duration bonds in later years; and
- incorporating exposure to asset classes that are positively correlated with inflation, such as real estate.
In addition to traditional asset classes of high quality government and corporate bonds and equities, the strategies incorporate varying allocations to less-traditional asset groups. These include real return bonds and real estate equity. Since the performance of these types of investments tends to have a lower correlation with traditional asset classes, they allow the strategies to pursue enhanced returns and reduced risk.
In addition, the equity component has been structured in such a way as to provide geographic diversification as well as market capitalization and investment style offsets with each other:
- Geographical diversification: Each target date strategy is diversified further by region to gain exposure to opportunities in Canada and around the world.
- Style diversification: Value, growth, core, fundamental, quantitative, income, and low volatility.
- Market capitalization diversification.
This results in a “core” global equity allocation which should perform consistently across different market cycles.
- We determined the appropriate asset allocation for our target date strategies through an optimization process, in conjunction with fundamental investment principles and practical risk considerations. The allocation plan itself is based on an in-depth modelling and scenario analysis conducted by our research teams and implemented by our portfolio managers. This series of annual adjustments comprises the pre-defined glide path along which each strategy progresses over time.
- The glide path modelling was carried out assuming three broad asset classes: nominal bonds, real return bonds, and equities. The sub-asset allocation (allocation within the broad asset classes) of the target date strategies is a function of the objectives and risks an investor faces at each point in their lifecycle.
- Given the importance placed on inflation-linked future income, the fixed income approach for the target date strategies focuses on reducing the impact of inflation. This is accomplished through the following:
- The strategies include a high allocation to inflation-linked bonds in the accumulation and transition phases, when investors are most exposed to the impact of inflation due to their long investment time horizon. High yield bonds are also incorporated to provide yield enhancement.
- The strategies incorporate exposure to asset classes that traditionally have been somewhat insulated from the effects of inflation, such as real estate.
- By shifting from long-term bonds to short-term bonds over time, the strategies match as closely as possible the inflation sensitivity of the fixed-income holdings with the income needs in retirement. Incorporating mortgages in the decumulation phase acts to provide high quality yield enhancement.
- Our equity holdings are structured to reflect the changing nature of the investor’s risks and objectives throughout the lifecycle.
- During the accumulation phase, there is an emphasis on growth, so an allocation to emerging market equities, and small- and mid-cap U.S. equities is made alongside a diversified allocation to global and Canadian equities.
- Throughout the transition phase (5 years before and after retirement), the equity weight is reduced and more defensive strategies such as global low volatility equities are introduced. In addition, the Canadian value equities transitions to Canadian dividend equities. This is expected to create an investment experience with a smooth path of returns and better downside protection.
- As the investor moves throughout the decumulation stage, the overall equity weight decreases and the portfolio becomes more defensive with an emphasis on global low volatility equities. This allows the investor to earn an equity risk premium while prioritizing preservation of capital.