Absent bespoke investing advice, these customized funds may be the next best solution

For those who already know when they plan to retire, an easy financial planning solution is the target date fund (TDF). This particular retirement fund was created in order to simplify the investing process.  TD Asset Management Inc. (TDAM) has come up with an offering that takes this type of investment to the next level.

At the early stages of their careers, workers generally have a greater appetite for risk, putting their retirement savings into higher yield investments, but as the retirement date approaches, to safeguard their investments, they should employ a more cautious approach.

For less savvy investors, or those who simply don’t have the time, TDFs do the work, so there’s no need to worry about protecting or shifting assets as the time to use them approaches. The TD Target Date Plus Funds chart a gradual transition or glide path for each plan member. Its length and severity depend on the specific fund, but it is always gradual.  

Andrew Croll, Managing Director, Alternative Investments, TDAM, and Nicole Lomax, CFA, Vice President, Portfolio Manager, Institutional Asset Allocation, TDAM, delve into the history of developing the funds.

Croll highlights, “From a product perspective, we were aware that we weren’t the first to the TDF market, so when designing, we wanted to take our TDF approach to the next level to enhance plan member outcomes.”

Lomax adds, “Engrained in how we operate at TDAM is a focus on clients. For Defined Contribution (DC) plans, that translates to individual plan member outcomes. TDFs that come with an asset mix that de-risks as plan members near retirement made a lot of sense in achieving strong plan member outcomes.”

What sets the TDAM TDFs apart is how they strategically incorporate features into the annual glide path with new underlying funds. Through active asset allocation, the funds are tactical about leaning into and out of underlying funds based on opportunities within the market and on how the rebalancing and glide path rolldown strategy is executed.

Croll says, “We have a 35-year history of integrating alternatives into public market asset mixes. Other players in the market are starting to think about adding private alternatives but we have the processes, procedures and systems and institutional know-how to execute with excellence.”

He defines private alternatives as physical assets that have underlying cash flow characteristics. Croll asserts, “Alternatives can include things like private equity and hedge fund exposures, but when you think about this from an asset allocation lens, what we're trying to deliver with the inclusion of private alternatives is equity-like returns with bond-like volatility, and you really get that diversification enhancement from asset classes like real estate and infrastructure.”

Lomax adds, “In our modelling, we focus on the worst and median case for plan member outcomes, such as account value at retirement and how long money lasts through retirement. We found that adding a material exposure to direct, private market alternative asset classes improved plan member outcomes. There are better outcomes because they can offer lower volatility and lower correlations to public markets and provide cash flows.”

A key feature of the TDAM alternatives that make them ideal for a TDF solution is that they are open- ended. This allows TDAM to manage the liquidity and asset mix decisions required by DC programs.

All of TDAM’s Target Date Plus funds include a material allocation to alternative investments in the asset classes of real estate, infrastructure and commercial mortgages. As to the rationale for such a high allocation, Lomax says:

“These are asset classes that large Defined Benefit plans have had access to for decades, and these assets, in the right fund structure - one that acknowledges their less liquid nature - make sense for DC plans too."

TDAM has been integrating alternatives in its investment strategy over multiple products and not just the TDFs. Other segregated and customized asset allocation solutions have benefited from this critical component of the execution strategy.

Lomax maintains, “By using our own internal alternative funds, which were developed to be part of multi-asset programs, we collaborate between the alternative investment teams and asset allocation portfolio managers. This collaboration allows boots-on-the ground team members who are seeking out deals to have insight into expected cash flows and deployable capital from multi-asset solutions. Likewise, the asset allocation team understands the timing of potential deal flow to queue up for investment. This reduces the friction in execution that can be present when investing in alternative assets"

To keep the TDF relevant to plan members, key updates are regularly made to the glide path, which Lomax explains is a “review of our assumptions accounting for any evolutions in plan member demographics, the retirement landscape and the investment environment."

“Through this process, we review and evolve the strategic asset mix. We evaluate asset classes or funds that may be able to further improve plan member outcomes.”

TDAM’s unique approach to asset allocation in adding value for plan members comes from being part of one of the largest Asset Allocation teams in Canada. TDAM has dedicated resources, looking at these decisions day-in and day-out, with a proven history of adding value through a disciplined approach to rebalancing rather than a simplistic automatic-at-month-end review.

Normally, passive focused TDFs have a large market share; however, TDAM decided on actively managed TDFs since the passive option is only available in public market fixed income and equity funds. When it comes to direct alternatives, there is no investable passive option.

“Outside of underlying funds, everything else is an active decision. It's a misconception that TDFs are truly passive,” Lomax holds. There are actionable variations in the glide path shape, the asset class allocations and rebalancing the fund (tactical or automatic).

“These active decisions are levers we can pull to add value to plan members,” Lomax says.

When looking for a unique solution that provides exposure to private market assets, while delivering stable incomes, TDAM has come up with a product worthy of plan sponsor consideration.

Read more in TDAM’s recently published paper, Bridging the Gap: Delivering a DB-Like Experience for DC Plan Members with Target Date Solutions and Alternatives.

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