Target Date Equity Exposure | Capital Group

Investment Insights

September 2018

Getting equity right in the target date distribution phase

Should a 65-year-old investor have the same equity portfolio as a 25-year-old? Most people would say no. But, surprisingly, this is the case for some target date series (including some passive ones).

Although all series reduce the amount of equity over time, some don’t change the composition of that equity. That’s important, because different types of stocks carry very different risk profiles. In particular, growth-oriented equities (think Facebook and Apple) have tended to be more volatile than more defensive, dividend-paying stocks.

For example, look below at the top 10 equity holdings of two target date series across the 2055 (early career), 2035 (mid-career) and 2015 (retiree) vintages: one from American Funds and the other from the largest all-passive target date provider (by assets under management). As of June 30, 2018, Facebook is the fifth-largest holding in the early-career fund of the passive target date series. This is not surprising, since growth-oriented equities are an important part of the accumulation phase. What is surprising is that Facebook is the fifth-largest holding in the 2015 vintage as well.

American Funds also holds growth-oriented stocks in the 2055 vintage. However, in the 2015 vintage, many of them have been replaced with more defensive, dividend-paying stocks. Changing the type of equity exposure in this fashion can help reduce the risk of the portfolio while still seeking capital appreciation to help build sufficient assets to last through retirement.

 

For retirees, the equity allocation in a target date fund should focus on two goals: maximize wealth-building equity and minimize equity volatility. American Funds Target Date Retirement Series seeks to meet both goals by gradually shifting  exposure to historically less volatile, higher yielding equity funds as participants near retirement.  This is illustrated in the chart below.

 

As the glide path moves into the distribution phase, the allocation to higher yielding equity funds rises, while the allocation to the more volatile equity funds phases out within the first five years after the retirement date. This is designed to help stabilize the portfolio, without giving up the potential for capital appreciation. When evaluating target date series, it is critical to examine the equity exposure. You might be surprised by what you find.

The target allocations shown are subject to the Portfolio Oversight Committee's discretion. The fund's investment adviser anticipates that the funds will invest their assets within a range that deviates no more than 10% above or below these allocations. Underlying funds may be added or removed during the year. Changes in the equity allocation within the underlying equity-income and balanced funds may affect the overall equity exposure in the target date funds. For quarterly updates of fund allocations, visit AmericanFunds.com.


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

Although the target date funds are managed for investors on a projected retirement date time frame, the funds' allocation strategy does not guarantee that investors' retirement goals will be met. The target date is the year in which an investor is assumed to retire and begin taking withdrawals. 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. Investment professionals continue to manage each fund for 30 years after it reaches its target date. 

Content contained herein is not intended to serve as impartial investment or fiduciary advice. The content has been developed by Capital Group, which receives fees for managing, distributing and/or servicing its investments.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.