DFA breaks into target date fund market with unique investment approach

Dimensional Fund Advisors is trying to break into a burgeoning target date fund market with the launch of a new TDF mutual fund suite that takes a unique investment approach compared with other asset managers in the defined contribution space.
Similar to other TDFs on the market, the Dimensional Target Date Retirement Income Funds — the firm’s first TDFs — allocate heavily to asset-growth producing securities such as global equities, for young retirement savers, but then shifts to a liability-driven investing strategy as a participant gets closer to retirement.
The liability-driven investing approach uses a large allocation to Treasury Inflation Protected Securities as a play to hedge against inflation, interest-rate and market risk. This way, DFA aims to provide a smoother and more certain level of consumption — or the drawdown of 401(k) assets — for retirees, which is a crucial consideration given the role of 401(k)s as Americans’ primary vehicle for generating retirement income, according to Stephen Clark, head of global institutional services at DFA.
In other words, the consistency, or volatility, of the retirement-income stream is the liability DFA aims to address.
“More and more, people need to rely on their 401(k) as a primary source of income, and given that’s what they need to rely on, they need to focus on the right goal,” Mr. Clark said.

THE STRATEGY
DFA’s TDFs, a collection of 13 funds that launched Monday, gradually allocate to a strategy meant to reduce uncertainty around inflation and interest-rate risk, which affect the income stream of a retiree’s portfolio, according to Mr. Clark.
Twenty years before a participant’s expected retirement date, the TDFs begin allocating to a “duration-matched TIPS strategy,” and the allocation ramps up to approximately three-quarters of the portfolio by the time the investor hits retirement. DFA manages the portfolios for a 25-year retirement income stream.
Typical TDFs allocate to nominal fixed income securities to reduce portfolio risk as participants get closer to retirement, Mr. Clark explained. The traditional approach, which seeks to reduce volatility of the asset base, doesn’t manage the right risks for participants, because it’s focused on accumulation rather than drawdown risk, he said.
“We think it’s important to look not only at the risk of your balance, but the risk of how much income you can afford,” Mr. Clark said. “[Our approach] is framing the goal from managing the volatility of wealth to managing the volatility of consumption.”
The drawdown phase of retirement has garnered a lot of attention among 401(k) industry watchers.
“Advisers are spending a lot of time studying drawdown and the best ways to do that,” said Barbara Delaney, principal at StoneStreet Advisor Group.
NO COPY-CAT
TIPS are fairly common within target date fund groups, but the allocation in most doesn’t exceed 10 percentage points, according to Jeff Holt, multi-asset analyst at Morningstar Inc.
The Dimensional 2030 Target Date Retirement Income Fund has a 20% allocation to TIPS, 65% global equity and 15% global fixed income; the 2015 fund has a 75% TIPS allocation, with the remainder in equities.
“I think the biggest nuance [of the funds] is the heavy use of TIPS, specifically in the retirement phase with that objective of more of an LDI objective to help meet the consumption needs of investors in retirement,” Mr. Holt said.
Further, the funds have what Mr. Holt referred to as a hybrid glidepath, combining both the to and through strategies used in TDFs. The retirement-dated fund maintains its equity allocation for about 10 years in retirement, and then becomes a bit more conservative after that, which is unique among TDF managers, Mr. Holt said.
There are currently more than 50 target date mutual fund series on the market, and although DFA is late to the game, the firm is doing something “markedly different” than the other players, which could prove useful for garnering assets, Mr. Holt added.
“It’s not a copy-cat strategy. It’s not trying to do what other people are already doing,” he said.
Fees relative to other TDF series should also be attractive to advisers, Mr. Holt said. Institutional shares have a cost range of 21 basis points for the most conservative fund, the 2015 fund, to 29 bps for the most aggressive, the 2060 fund.
That compares to an average asset-weighted expense ratio of 78 bps for other target date mutual funds on the market, according to Morningstar.
StoneStreet Advisor Group’s Ms. Delaney said DFA’s strong brand among advisers could also help them win assets in a crowded TDF market.
“With DFA you have a group of advisers that are ‘groupies’ and then those who are agnostic to it,” Ms. Delaney said. “But there’s definitely a very different following versus every other fund [company] out there.”

Related Topics: Dimensional Fund Advisors Inc.