Equity may be the primary driver of target date returns, but fixed income decisions can have a significant impact on a target date series’ results.
At Capital Group, home of American Funds, we believe bonds anchor the glide path by seeking to provide capital preservation, income, diversification from equities and targeted inflation-hedging.
The types of fixed income shift as participants progress:
- U.S. government securities in the early accumulation stages to dampen equity volatility,
- Higher-yielding bonds in the transition stage to expand income potential,
- Tactical flexibility through the use of multi-asset funds to adjust the equity and fixed income mix based on market conditions, especially at or near the target date,
- High-yield, non-U.S. bonds and Treasury Inflation-Protected Securities (TIPS) during the distribution stage to provide diversified sources of income potential.
Our measured approach to fixed income can be seen in our American Funds Target Date Retirement Series®:
- Active bond management seeks to avoid “index drift” through adjustments in duration, credit selection and sector exposures as the rate outlook and issuance patterns change.
- Use of underlying bond funds that adhere to their stated objectives avoids the temptation to reach too far out on the risk spectrum for yield or total return.
- Emphasis on high-quality short- and intermediate-duration strategies provides higher potential levels of capital preservation and equity diversification.
When evaluating fixed income in a target date series, it’s important to determine whether the underlying funds’ risk-return profile aligns with the fund’s intended role in the glide path. Examine a fund’s asset mix and equity correlation to assess whether it is staying true to its objectives.