PLANSPONSOR - September 2017 - 34

Frankly, Collie says, he is concerned that purchasers of
target-date funds fail to see the whole picture when it comes to
comparing and evaluating managers, glide paths and, ultimately,
performance. Hence, there has been little consideration of what
the appropriate role of aggressive tactical strategies might be in
the TDF marketplace.
" For TDFs here in the U.S., peer group pressure [to adjust
allocations and pursue excess returns] comes not from the formal
objectives of funds, but rather as an indirect side effect of the way
funds are, in practice, evaluated, " he says. In other words, plan
sponsors have increasingly favored those funds with the best shortterm
performance-perhaps one-year or three-year. This means
the best chance of winning new assets is achieved by managers
with the right tactical biases in the current, transitory environment,
" not by those with the best long-term
strategy for participants, " Collie says.
No one is arguing that TDF purchasers
should completely overlook shorter-term
performance metrics, which are clearly
important in their own way. However, Collie
stresses, TDFs are meant to be very longterm
and strategically minded investments
that should maintain their basic conviction
throughout different market conditions.
Of course, tactically minded investors have
been happy to reap the benefits of a banner
decade of bull markets, but what will happen
when markets inevitably shift? According
to Collie's account and those of other
sources, the pursuit of TDFs that strive to
outperform the universe of other TDFs has
ramped up risk and permitted a measure of
market-timing among retirement investors.
platform model-i.e., they can leverage the fact that everything is
conducted in-house and can make " calculated, short-term shifts
in asset weightings as market opportunities present themselves. "
" Many off-the-shelf managers actually choose not to use
tactical asset allocation at this time, although we believe it can
provide a benefit to plan participants when it is thoughtfully
executed by an experienced team, " Notto and Oldroyd wrote. " On
the other hand, the operational challenges of making shorterterm
shifts mean that very few, if any, recordkeeping platform
models can employ tactical asset allocation. "
Their analysis does not address fully custom solutions, which
have different considerations and options for plan sponsors.
From the " strategic " perspective, Oldroyd and Notto also
argue that off-the-shelf products might be at an advantage at
... it is crucial
for plan
sponsors to
understand how
their managers
are defining
and weighing
the possibilities
of strategic
vs. tactical
positioning.
" That's meant having a big home-market bias during a
period of U.S. market and U.S. dollar strength, " Collie says.
Sizing Up the TDF Market
Recently, two TDF experts with J.P. Morgan Asset Management,
in New York City-Daniel Notto, Employee Retirement Income
Security Act (ERISA) strategist, and Dan Oldroyd, portfolio
manager and head of TDF strategies-examined a similar set
of issues, publishing their findings in a white paper aptly titled
" Choosing a Target Date Strategy. " The pair's analysis, while
slightly limited in its scope of the market, is somewhat more
optimistic than Collie's about the role that can be played, within
bounds, by tactical thinking in target-date funds.
According to Notto and Oldroyd, " Beyond the basic issue of
fiduciary responsibility, a variety of factors must be taken into
account in choosing between off-the-shelf and platform model
[i.e., open-architecture] TDF strategies. Tactical asset allocation
is one important consideration. " The two observe that off-theshelf,
or " proprietary, " mututal fund strategies can much more
easily utilize tactical asset allocation than can a recordkeeping
34 PLANSPONSOR.com September 2017
this juncture: " Some of the best off-theshelf
strategies include extended asset
classes, such as real estate, Treasury inflation-protected
securities and commodities,
along with the foundational asset
classes of equities, fixed income and cash.
That wider opportunity set may not be
available on platform models. "
Given their respective roles at a bigbrand
proprietary fund manager such
as J.P. Morgan, the two experts conclude
that these facts " represent a notable
constraint " on platform-model TDFs: " We
have found that extended asset classes
can be a valuable source of attractive
risk-adjusted returns, especially in volatile,
lower-return market environments.
Recordkeeping platform models may also
restrict the number of managers that can
be included in their target-date strategies. "
Another Word on Tactical Management
Collie's colleague at Russell, Leola Ross, director of capital
markets research, also in Seattle, describes tactical trading as
an investment style based on anticipated themes or trends in
global equity, interest rate, commodity and currency markets.
" Strategies are typically directional, although relative-value
approaches may also exist, " she notes. " In a directional strategy,
managers take a position, either long or short, on the direction in
which they think the overall market will move. A manager who
has taken a long position will benefit if the market rises, and one
who has taken a short position will benefit if the market falls. "
A relative-value approach involves managers taking a position
on the gap between where a security-or, more likely in the
TDF space, a group of securities-is currently priced and where
it is expected to be priced at some future point. The bottom line,
Ross says, is that tactical trading can add real value if executed
successfully, but incorrect tactical positioning can easily cut into
participant accounts. -John Manganaro
http://www.PLANSPONSOR.com
PLANSPONSOR - September 2017

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