Target Date Funds & The Asset Allocation Theory

Target Date Funds & The Asset Allocation Theory

February 9th 2012

IAIP organized a Speaker Event on February 9th 2012 in Mumbai, wherein John Rekenthaler, CFA, Vice President Research at Morningstar Inc, gave an insightful presentation on Target Date Funds and the Asset Allocation Theory. The session was well attended by the members of the society. This event qualified for 1.0 CE credit hours.


To begin with Target Date Funds are hybrid mutual funds that automatically reset the asset mix (essentially stocks, bonds, & cash equivalents) in their portfolio according to a selected time frame that is appropriate for a particular investor. According to John, these funds are most popular and dominated with defined contribution plans. They have seen net inflows of $150bn over the last three years and their current size is estimated at $300bn. These funds are mainly sold on asset allocation capabilities of the managers. In terms of the structure of these funds more than 50% of underlying funds are managed on active basis; though now index funds and ETFs have been added into the plans. And so do the new asset classes such as alternatives, TIPS, high yield bonds, foreign bonds have been making their way into them.

Innovations are coming in several areas viz. risk/volatility management, tactical allocation, diversification, glide path reconsideration etc.  The 2008 bear market has a big effect on buyers of asset allocations managers.  Accordingly managers have started adding long-short or absolute return strategies, publicly traded real estate securities etc. Following losses in 2010 Alliance Bernstein came out with volatility management sleeve, Vantagepoint Milestone Funds introduced low volatility low correlation oriented strategies and PIMCO incorporated a tail-risk hedging for investor near to retirement to cite few examples.

On the horizon are other innovations such as improved retirement income strategies with guaranteed component; though portability, cost of insurer, solvency are the factors to be watched out for. Custom target date solutions are being offered to large corporation like IBM based on their employee demographics.

Ibbotson Associates, which was taken over by Morningstar in 2006, is thought leader on human capital’s role in the asset allocation decisions. John gave the flavor on how to consider and integrate human capital into asset allocation decision and equity glide paths during the lifecycle right through the accumulation and retirement stages. His insights revolved around critical questions – “Given a defined market portfolio and human capital characteristics”, how aggressively ones financial capital should be invested or what should be the proportion of risk assets in ones portfolio? The answers to these could be arrived at scientifically.

About the speaker:      

John Rekenthaler, CFA is Vice President of Research at Morningstar. In this role, he oversees Morningstar’s research methodologies and is involved in a variety of new development efforts. His recent projects in 2009 include the launch of the Morningstar Target-Date Fund Series Rating and Research Reports and the Morningstar Global Fund Investor Experience Survey. The former project consists of comprehensive reports on 20 of the largest U.S. target-date fund series, while the latter is a one-of-a-kind study that examines how mutual fund investors are treated in 16 countries across Europe, Asia, and North America. He holds the Chartered Financial Analyst (CFA) designation, and is a member of the Investment Analysts Society of Chicago.


As a participant of the CFA Institute Approved-Provider Program, Indian Association of Investment Professionals has determined that this event qualifies for 1.0 CE credit hours. If you are a CFA Institute member, CE credit for participation in this program will be automatically recorded in your CE diary.

The presentation is also uploaded on the India page of the CFA Institute (

Contributions from: Chetan Shah, CFA and Amit Maheshwari, CFA, both IAIP Volunteers

1 Comment

  • David

    I’m a recently retired teacher who would really be interested in finding out how often asset allocations should be monitored and analized.

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