Target Date Funds. Our optimal multi-manager solution

Transcription

1 Target Date Funds Our optimal multi-manager solution

2 Contents 01 Combining simplicity and quality 02 What sets Standard Life TDFs apart 03 How we built the optimal TDFsof TDFs 07 Governance and product evolution 08 How Standard Life TDFs work

3 Combining simplicity and quality Target Date Funds are becoming more and more popular as plan sponsors look for ways to make investing simple for their members. Standard Life Target Date Funds (TDFs) offer that simplicity, and more. Target Date Funds 01

4 What sets Standard Life TDFs apart Standard Life offers a series of ten TDFs with dates of 2055, 2050, 2045, 2040, 2035, 2030, 2025, 2020, 2015, as well as the Standard Life Retirement Fund. Here is how our approach sets them apart: Avenue portfolios risk management philosophy We built our TDFs around the Avenue portfolios investment risk management philosophy, offering plan sponsors and members an investment solution that s at once sophisticated and simple. The glide path A meticulous methodology was used to design the glide path of the TDFs so that they provide an optimal investment solution for members from a risk, return and cost perspective. Optimized asset allocation Asset allocation throughout the glide path is optimized within equity and fixed income. This results in the use of multiple styles for equity and different mandates for fixed income. Multi-manager Our approach: multi-manager, active and passive, multi-style and multi-mandate Best-in-class investment funds were used to achieve this objective; passively-managed index funds were selectively used to minimize fees without sacrificing performance and complementary asset classes and investment styles were used to minimize volatility of returns. This integral approach makes our TDFs solution unique in Canada. Quality & Choice investment program Underlying funds have been carefully selected using Standard Life s rigorous and well-established Quality and Choice investment program (Q&C) to ensure that investment mandates are given to best-in-class and proven managers. Through Q&C, underlying funds, managers and asset allocations are monitored to ensure that there is no deviation in the underlying funds long-term investment objectives. A sound investment strategy With their effective design and rigorous monitoring, TDFs can go a long way in providing peace of mind to both plan sponsors and their members with respect to the investment strategy, given that the portfolio risk decreases as retirement gets closer. Multi-style Multi-mandate Active and passive 02 Target Date Funds

5 How we built the optimal TDFs TDFs were built using a rigorous process that included modeling, determining the glide path, optimizing the asset allocation within equity and fixed income, and finally, selecting the most appropriate underlying funds from a return, risk and cost perspective. A) Modeling B) Glide path C) Optimization D) Funds selection A) Modeling We began by using a sophisticated simulation model to generate thousands of investment return scenarios. Those results were used to determine the optimal shape of the glide path and the risk allocation of the TDFs. B) Determining the glide path Next, we used a five-step approach to determine the most appropriate equity/ fixed income allocation for every stage of the member s accumulation phase. Process i) Identify the range of long-term asset allocation ii) Identify the range of short-term (retirement) asset allocation iii) Identify possible shapes of the glide path (how to move from long-term to shortterm allocation) iv) Create an efficient frontier using multiple glide paths v) Select the glide path based on the risk profile that we assume members invested in a TDF will have Target Date Funds 03

6 Risk management philosophy Our TDFs share the same risk management philosophy as Avenue portfolios, so the glide path moves more or less diagonally from an aggressive to a conservative asset allocation. > 25 years 50% equity Investor profile Moderate > 25 years > 25 years 80% equity Efficient frontier Each of the points on the graph below illustrates a combination of long-term asset allocation, short-term asset allocation and shape of a glide path. From this, it is possible to draw an efficient frontier. All combinations that are on the frontier are efficient as they provide the best average return for a given level of risk years Moderate years years Efficient frontier Investment period years years Moderate years Moderate years years years Average return 5-10 years Moderate 5-10 years 5-10 years Low risk Risk profile Risk measure High risk < 5 years 30% equity Moderate < 5 years < 5 years 50% equity We chose our TDFs glide path on the efficient frontier based on our belief that members who choose or default to a target date fund solution are slightly more conservative than the average member. Average member Standard Life assumed typical risk profile of a TDFs investor Range of risk profiles of target date funds members These members tend to select their own asset allocation 04 Target Date Funds

7 C) Optimizing the asset allocation We found that while members can benefit from a higher proportion of fixed income in their mix as they approach retirement, they can also benefit from improving the allocation within the equity and fixed income portions of their portfolios. We used an extensive array of asset classes and complementary investment styles within each of the major asset classes to ensure an appropriate control over the volatility of returns. Likewise, we may vary asset classes and investment styles over time to ensure that the level of risk is appropriate during the different stages of the accumulation period. For example, our TDFs use the following approach for fixed income: a larger proportion of long-term bonds and corporate bonds when the member is many years from retirement a larger proportion of the broad Canadian bond market when the member approaches retirement The following graph shows the asset allocation (equity vs. fixed income) over the accumulation period: Equity vs. fixed income over the accumulation period % of investments Long-term bonds Corporate bonds GARP Core Emerging markets Years from retirement Equity exposure Fixed income exposure Canadian bonds Corporate bonds Long-term bonds Core Value Target Date Funds 05

8 D) Selection of underlying funds In selecting the most appropriate underlying funds for our TDFs, our objective was to offer a solution that would be suitable for less experienced investors while exploiting the most effective investment options within the current market and economic environment. As such, our approach to building superior but simple target date investment solutions was to optimize net return while taking into account the level of risk. Standard Life will regularly be analysing whether passively or actively managed funds are more suitable for a given asset class from a risk and net return perspective of the entire portfolio. And, having full access to the Quality & Choice universe of funds and managers has allowed us to select best-in-class managers for each asset class. For the current underlying funds, we chose the following fund managers: Canadian Equity (Value) U.S. Equity International Equity (GARP) (Passive) (Core) (Emerging markets) Fixed Income (Passive and active) 06 Target Date Funds

9 Governance and product evolution What is considered effective today may change in 2 years, 10 years or 15 years down the road, so proper investment governance and regular manager monitoring is essential. The Quality & Choice investment program is applied to Standard Life TDFs through each of its underlying funds, which ensures that the product stays on track to meet its objectives. The monitoring of the underlying funds indirectly ensures that there is no deviation in the TDFs expected long-term investment objectives. In addition, Standard Life is continuously looking for opportunities to improve its group retirement solutions, so it is expected that the product will evolve over time. Glide path The adequacy of the glide path will be reviewed every 3 to 5 years in the context of the strategic asset allocation review of Standard Life s group retirement solutions. Optimization The TDFs asset allocation will be reviewed every 3 to 5 years or more frequently should we believe the product can be enhanced; for example, with the introduction of a new asset class or by the modification of the asset classes weightings. Underlying funds monitoring Under the Quality & Choice investment program, underlying funds used in TDFs are monitored on a regular basis to ensure compliance with investment objectives, management stability and appropriate risk-adjusted return. More frequent monitoring Glide Path Optimization Funds monitoring Target Date Funds 07

10 How Standard Life TDFs work TDFs are based on the member s anticipated retirement date. The asset allocation of a TDF shifts over time towards a more conservative portfolio as the member nears retirement. Their composition and glide path The asset allocation of the TDFs is adjusted according to the following glide path Overview of TDFs % of investments Years from retirement Canadian Bond Index Fund (SLI) Corporate Bond Fund (SLMF) Long-Term Bond Fund (SLI) Canadian Equity Fund (Beutel Goodman) Canadian Equity Fund (Guardian) US Equity Index Fund (SLI) International Equity Fund (SLI) Emerging Markets Fund (AGF) Between each 5-year period, the target asset allocation moves in a straight line (linear interpolation). More benefits for sponsors and members Rebalancing Our philosophy for portfolio rebalancing is to take into account return, risk and cost together. We effectively achieve this through systematic quarterly rebalancing to the target asset mix Furthermore, the target asset allocation of a TDF is changed in the last month of every year to follow the glide path Maturity When a TDF reaches maturity, it will remain open for investment and new contributions for two years The two-year period will allow members, like those who want to keep working after their target date, to transition gradually to retirement while continuing to grow their investments Afterwards, assets will be automatically transferred to the Standard Life Retirement Fund which will have the exact same asset allocation as the TDF at maturity Fees and assets To maximize net returns, we make sure to strike the right balance between investment management fees and performance by using an optimal mix of actively and passively managed underlying funds Fees are levelled across all TDFs 08 Target Date Funds

11 Our approach We took the target date fund concept and applied our own approach to create an optimal, sophisticated multi-manager solution that s simple to implement, and provides a sound investment strategy for members. Talk to us today about Standard Life TDFs.

12 Find out more Contact your Standard Life representative. This document provides information which reflects the product at the time of its publication. Though Standard Life has taken all reasonable care to present accurate information, it reserves the right to correct any error or omission. It also reserves the right to change, adapt or terminate this product offering at any time without notice. The Standard Life Assurance Company of Canada Standard Life Assurance Limited GE12965A GS Standard Life