Keys to target date success
03 mins 32 secs
American Funds video transcript: “Keys to target date success”
Apu Sikri: It's interesting that even as capital markets’ assumptions for equities have declined, many target date providers have increased their equity allocation in recent years. What, in your view, has driven this shift to the point that it's now become sort of a consensus view amongst target date providers?
Ralph Haberli: Equities are a very good thing to hold over the long term. And if you look at a target date in particular, it really is designed both for a 25-year-old and a 55-year-old and a 65-year-old. If you are 25 or 30 — you're getting going in a career, you're starting to save — holding those equities for the long term can have a lot of benefits.
I think that's what you’ve seen reflected in the marketplace. Again, I'll go back to it's not just equities; it's the type of equities that really matter. The stocks you want to own as a 25-year-old are quite different than the stocks you'd want to own as a 65-year-old. So, owning Apple makes a whole lot of sense for my 25-year-old cousin. Doesn't make as much sense for my 65-year-old aunt. Still want stocks in that portfolio, but a different type of characteristic that's going to have more of a dividend income-generating quality.
So, generally in the construction of target date equities today, it's the nature of that that I think we're seeing evolve and really differentiate amongst different philosophies and objectives in those funds.
Apu Sikri: The American Funds target date series has been successful. It's done very well relative to active peers and passive vehicle providers. What do you think has enabled the series to deliver for participants in the way that it has?
Ralph Haberli: Capital Group was a bit of a late entrant to the target date marketplace. You mentioned the roughly 20 years of target date. Our series [is] coming up on its 11-year anniversary, so a bit of a late entrant. But certainly we’ve seen a lot of traction in delivering, really, how Capital Group invests through a target date vehicle.
And there are, I think, a couple reasons that really rise to the fore there. The first is just the strength of our underlying investments of funds. So, in one target date vehicle you get access to roughly 20 underlying strategies, and those funds are then put together in a way that really acknowledges some of the topics that we touched on before. So, not just stocks and bonds, but tapping into those funds to get — I’ll use the equity example — equities that then evolve over time. And there's a certain flexibility in how we manage here at Capital Group that really lends itself to that gliding concept, that evolving equity concept.
And then, finally — and perhaps most importantly — bringing it all together is a very experienced group of managers. Most are also managers in underlying strategies. Average experience 30 years. So, that group really puts it all together and brings an insight and experience to the marketplace that certainly predates our own series by a couple decades. And taking that long-term view for a strategy — that really long-term orientation — I think is one of the reasons we've seen the success that we have. And it's a lot of those inputs that process the underlying funds in management that's led to very strong results.
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Although the target date funds are managed for investors on a projected retirement date time frame, the fund's allocation strategy does not guarantee that investors' retirement goals will be met.American Funds investment professionals manage the Target Date Fund's portfolio, moving it from a more growth-oriented strategy to a more income-oriented focus as the fund gets closer to its target date.The target date is the year in which an investor is assumed to retire and begin taking withdrawals. Investment professionals continue to manage each fund for 30 years after it reaches its target date.
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American Funds Target Date Retirement Series® has posted strong results over its relatively brief history. Ralph Haberli, head of institutional retirement at Capital Group, details the likely reasons behind the series’ success.
Learn more about American Funds Target Date Retirement Series.