Asset allocation FOR PROFESSIONAL CLIENTS ONLY NOT FOR RETAIL USE OR DISTRIBUTION

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1 Asset allocation FOR PROFESSIONAL CLIENTS ONLY NOT FOR RETAIL USE OR DISTRIBUTION

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3 Plotting a path to retirement success In defined contribution (DC) plans, making effective asset allocation decisions is just as important as how much plan members contribute when determining whether they will successfully cross the retirement finish line. Target date funds aim to provide the most appropriate asset mix for members along the journey to retirement. Unlike lifecycle structures, target date funds can easily update their asset allocation at any time in light of long-term developments. And thanks to their single-manager structure, they can also actively adjust the portfolio to reflect short-term market trends. TARGET DATE FUND ASSET ALLOCATION 1

4 Asset class diversification Lifecycle structures typically offer limited asset class diversification while target date funds tend to be diversified across a broader range of assets. Equity Global stock markets provide the main engine for capital growth, particularly in the early stages of the glide path, while offering a long-term hedge against inflation. Fixed income Global bond market exposure adds diversification in the early stages and reduces volatility as retirement approaches. Alternative beta Hedge fund risk premia have a low correlation with other assets, so they can help boost diversification as portfolios de-risk. Real return assets Exposure to commodities, natural resources equities and index-linked bonds can dampen the impact of inflation. Cash/liquidity funds Cash and money market instruments can help minimise volatility of returns and increase portfolio liquidity in the run-up to retirement. TARGET DATE TIP Help more members reach a minimum level of income replacement by looking for actively managed funds that provide access to a diverse range of traditional and alternative asset classes. 2 TARGET DATE FUND ASSET ALLOCATION

5 Glide path design Strong long-term asset allocation across a range of asset classes can help maximise returns, and help plan members achieve their financial goals in retirement. Lifecycle structures automatically rotate out of riskier assets at pre-set dates, but target date funds can change much more dynamically over time. Their strategic asset allocation can be quickly and efficiently adjusted to reflect long-term changes in asset class return forecasts and correlations, member behaviour (such as an increase or decrease in contributions) and pension legislation. It s this ability to quickly and efficiently adapt their long-term asset allocation that gives target date funds the potential to deliver enhanced long-term returns. TARGET DATE TIP Choose proven multi-asset target date managers who base their long-term asset allocation on rigorous capital market return and correlation assumptions. TARGET DATE FUND ASSET ALLOCATION 3

6 A typical target date fund glide path The chart shows a typical target date glide path (the changing mix of assets that the fund invests in as it progresses to its target date). Target date funds can allocate to a diverse range of asset classes. Each asset class has a specific role to play as plan members make their way towards retirement. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% BONDS STOCKS A well-diversified asset allocation strategy can generate enhanced long-term returns, helping members reach their financial goals in retirement. The ability to diversify across asset classes means managers can select the best asset mix for members, switching from capital growth in the early stages to higher liquidity and lower volatility closer to retirement. Some target date funds may start with a higher proportion of stocks or bonds, while others may decide on a different glide path towards retirement, depending on the fund s objectives. Glide path TARGET DATE FUND ASSET ALLOCATION

7 With just one manager, plan members can benefit from more sophisticated portfolios that can help boost their long-term risk-adjusted returns. TARGET DATE Success is all about helping as many plan members as possible to achieve financial security in retirement, so default managers need the ability to change their asset allocation dynamically Years to retirement TARGET DATE FUND ASSET ALLOCATION 5

8 Active asset allocation Turbulent markets demand the ability to make short-term adjustments to portfolios which is critical to mitigating risk and maximising new investment opportunities. While lifecycle structures lack this flexibility, target date funds can actively adjust their long-term glide paths to reflect short-term market themes. An active asset allocation approach that incorporates a diversified range of lowly correlated assets can deliver additional returns, which can add up to a large increase in performance when compounded over the long term. This can help to boost member participation and contribution levels and improve the chances that plan members will make it safely over the retirement finish line. TARGET DATE TIP Focus on funds that can reflect short-term market opportunities, as the additional returns produced can help significantly improve retirement outcomes for plan members. 6 TARGET DATE FUND ASSET ALLOCATION

9 Holistic portfolio management In contrast to lifecycle structures, which are made up of individual funds, target date portfolios are managed holistically by a single manager. Target date funds are managed by professional fund managers, who use their expertise to fully evaluate risks and correlations when taking asset allocation decisions. Importantly, managers can modify their asset allocation quickly and efficiently without the need for member approval or the extended due diligence that comes with making changes to a mechanistic lifecycle structure. As a result, target date funds give plan members access to more sophisticated portfolios that can help them retire with the level of savings they need. This frees up DC plans to focus on raising member contribution levels which is critical to ensuring retirement success. TARGET DATE TIP Pick a target date fund manager with a holistic approach, setting asset allocation as well as selecting the investment strategies for the portfolio. TARGET DATE FUND ASSET ALLOCATION 7

10 Measuring success Lifecycle structures tend to focus on relative performance, but for DC members, success is defined by having enough savings to maintain their standard of living in retirement. Benchmarks are extremely useful for evaluating portfolios on a day-to-day basis and for making peer comparisons. But for default funds, the real measure of success is whether investment design helps the majority of members to achieve financial security in retirement. Asset allocation is key to this success for members, in particular the ability for portfolio managers to adjust allocations through time to consistently deliver an appropriate glide path focused on improving long-term income replacement levels. TARGET DATE TIP Choose funds with asset allocation models that focus on helping members to retire with the level of income they need, rather than focusing solely on relative performance. 8 TARGET DATE FUND ASSET ALLOCATION

11 ASSET ALLOCATION CHECKLIST Use our checklist to ask whether your DC default option provides plan members with the most effective asset allocation throughout their journey to retirement. Does your default fund provide access to a wide range of asset classes? Are strategic allocations made by multi-asset experts? Can your default fund reflect short-term market opportunities? Are asset allocation decisions made holistically by a single manager? Is success based on income replacement, as well as benchmark performance?

12 To find out more about target date funds, visit or FOR PROFESSIONAL CLIENTS ONLY NOT FOR RETAIL USE OR DISTRIBUTION. This document has been produced for information purposes only and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P.Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. Both past performance and yield may not be a reliable guide to future performance and you should be aware that the value of securities and any income arising from them may fluctuate in accordance with market conditions. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co and its affiliates worldwide. You should note that if you contact J.P. Morgan Asset Management by telephone those lines may be recorded and monitored for legal, security and training purposes. You should also take note that information and data from communications with you will be collected, stored and processed by J.P. Morgan Asset Management in accordance with the EMEA Privacy Policy which can be accessed through the following website Issued in the UK by JPMorgan Asset Management (UK) Limited which is authorized and regulated by the Financial Conduct Authority. Registered in England No Registered address: 25 Bank St, Canary Wharf, London E14 5JP, United Kingdom. JPM /15