David Hutchins of AllianceBernstein (AB) explains how the firm's target-date funds kept a lead through a challenging market environment
What is particularly pleasing about this performance is that it has been achieved in a challenging investment environment. Over the past few years, markets have had to cope with a series of political and policy shocks. These have ranged from the Chinese devaluation to the Bank of Japan's adoption of negative interest rates to last summer's Brexit vote in the UK. But our TDF range has weathered the various market squalls - underscoring the strength and flexibility of our dynamic asset allocation.
While our performance record is satisfying, we are determined not to rest on our laurels. We know that the market environment is always changing. Consequently, we cannot count on what worked in the past to work in the future. The current bull market in equities has been underway since 2009. But as interest rates rise and the global economy struggles to grow, we expect future returns to be significantly lower. Given that prospect and in line with our established investment approach, we will continue to increase the diversification of the investments within our TDF range. By so doing, we aim to keep our TDFs fit for purpose in a rapidly evolving investment environment.
So how are we planning to maintain the lead we have enjoyed over both our competitors and market indices? First, we are focusing on expanding our investment capability into new areas. In recent years, the correlations between conventional asset classes have increased significantly. This means the benefits of diversification between these asset classes are declining. So we are seeking to enhance our asset allocation by considering areas that offer radically different return profiles. In particular, we are looking at investments in private and illiquid markets. Initially this will be for some of our custom TDF clients, but we will seek to roll it out more widely thereafter. As correlations continue to rise, these less liquid markets offer us scope for effective diversification and genuinely uncorrelated returns.
At the same time, we are also exploring new options in the public markets, by seeking alternative risk premia. Our goal here is to achieve hedge-fund-like returns but at a far lower cost. To this end, we have integrated the Ramius liquid alternatives investment team into ours. Ramius' expertise will provide our TDF range with access to a broad range of alternative return sources - but without the illiquidity risks and cost that these areas usually entail.
Another innovation has been the introduction of a factor-based investment approach. We added this to our packaged TDFs in 2016 as part of the gradual evolution of our strategic asset allocation. Factor-based investing is popularly known as 'smart beta'. It involves dynamic allocation to a range of factors including profitability, momentum, capital use and deep value. By controlling allocation to these factors, AB's factor-based strategies aim to avoid the 'buy high, sell low' paradigm of conventional passive equity approaches.
In introducing these innovations, we are conscious that we need to achieve genuine diversification, not simply pay a higher price for exposure to the asset classes that are already represented in our portfolios. Instead, we have been looking for truly new or unique sources of return.
But we haven't just been innovating in our asset allocation. We have also been striving to ensure we continue to outperform our competitors in our understanding of what DC investors need, as well as in the strength and transparency of our process. Accordingly, we have developed a new tool, CyRIL™, that creates a robust framework for setting investment objectives, whether these are for a default strategy or a personalised investment strategy.
By using liability-driven investment techniques to establish investment objectives that are fully aligned with the client's needs, CyRIL™ focuses on investor outcomes. As with some of the well-known online property valuation tools, you can add as many layers of detail to the process as you want. These not only include earnings and age, but other important indicators of future requirements, such as education, job role and current savings. Crucially, it is not a 'black box' model but a fully transparent process that can be reconfigured at any stage to reflect the requirements of the individual investor or plan trustees.
Finally, we have increased our emphasis on reducing transaction costs across our entire range of default strategies. By combining clear value for money with the market-leading transparency and market-beating performance of our TDF range, we are confident that we can keep ahead of our competitors in the rapidly evolving investment environment that we expect in the years ahead.
Portfolio manager -
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.