PLANADVISER - September/October 2017 - 34

Balancing Target-Date Risks
For Changing Market Environments
Longevity risk must be balanced against
other risks when managing a target-date
portfolio for a diverse group of participants.
W
hen constructing a target-date
fund [TDF] glide path, how the
fund manager addresses risk determines
the success of the fund-and
investors' retirements. Building wealth
fast early on is a favored approach,
but American Century Investments®
says it's often forgotten-until
right
before a fall-that like running a marathon,
winning the retirement race
requires the correct pace and balance.
Alison Cooke Mintzer, editor-in-chief
of PLANADVISER, recently spoke with
Richard Weiss, chief investment officer,
multi-asset strategies, at the company
about its more measured, balanced
approach to managing risk and the
success of that long-term strategy.
PLANADVISER: What
risks
should
be considered in creating a glide
path? Are some more significant than
others?
RICH WEISS: There are a variety of
risks involved in target-date fund
risk management, chief among them
longevity risk-the risk of outliving
wealth. But constructing a superior
glide path is not as simple as
minimizing longevity risk, because,
when you seek to do that, you exacerbate
one or more of the other risks
inherent in lifecycle investing. Market
risk, inflation and interest rate risk,
sequence-of-returns risk, tail risk, and
abandonment risk all must be carefully
considered, measured, and effectively
balanced to design a successful
target-date glide path.
Take abandonment risk and the associated
tail event risk: what are the risks
of an extreme event occurring, driving
down returns during a lifetime, and will
that trigger a decision to abandon the
strategy altogether? This is a notorious
risk in retail investing because many
investors without professional counseling
or a professional strategy will
abandon an investment at precisely the
wrong time, after a big downturn.
There are also several risks that
come into and out of play during a strategy's
life cycle. Inflation and interest
rate risk typically become more important
in retirement as one has more
fixed-income investments.
Sequence-of-returns risk is a more
subtle and insidious risk concerning the
steepness of the glide path. It's basically
" luck of the draw " risk, or where
and when the bull and bear markets hit
in a lifetime. A young investor encountering
a 2008 in a very far-dated targetdate
fund would feel less impact in
dollar
terms and has the most
time
to make up the loss. But for investors
about to retire, who have built up the
majority of their retirement wealth, a
significant bear market can be devastating.
Consequently, the exact timing
or " sequence " of returns in one's lifetime
can be a major risk.
PA: How do target-date fund managers
think about and manage these risks?
WEISS: Fortunately, all the risks
discussed above can be measured and
managed. It's how they are balanced,
or weighted, that differentiates targetdate
fund managers. Individual targetdate
fund managers often lean toward
weightings that are appropriate for only
certain employee plan demographics.
For instance, in emphasizing
longevity risk, many managers aim for
the highest expected return during the
accumulation phase of a target-date
strategy. But that brings many possible
outcomes: some of the investment
strategies may do very well, but others
SPONSORED SECTION
Rich Weiss
Chief Investment Officer,
Multi-Asset Strategies
will do very poorly. Thus, there's a
dispersion of possible return outcomes
and, accordingly, a larger probability of
failure in retirement.
We've taken a more balanced
approach than most of the competing
target-date structures in the industry.
Our position is highly differentiated
because of our dedication to minimizing
the subtle risks as well as the major
ones. This means, at times we may not
show the highest absolute return over a
short period, such as in the very recent
bull market. Competitors who emphasize
longevity risk may have a higher
return in the near term, but they also
have much higher risk. How well we
balance multiple risks is evident in our
risk-adjusted returns over time-what's
commonly known in the industry as
a Sharpe ratio. Why is risk-adjusted
return an important metric to measure
and
compare? Because
it directly
relates to wealth accumulation and, in
turn, successful retirement outcomes.
PA: How have you evolved your risk
management approach to incorporate
the market environment?
WEISS: Our goal
is to fine-tune the
risk-balancing act by accounting for the
PLANADVISER - September/October 2017

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