Target Date Funds Get Active: A Look at the Innovation Behind BlackRock’s LifePath® Dynamic Strategy

BlackRock is bringing both its passive and active management expertise to bear in a differentiated approach to target date investing. So far, the results have been promising. The LifePath Dynamic Retirement Fund has produced 4.83% cumulative alpha, net of fees, over its non-tactical predecessor in the almost five years since its inception.ⁱ

To explain what’s behind the fund’s success to date, and why some plan participants may benefit from active exposure and tactical positioning in a target date fund, Stacey Tovrov, Head of Investment Strategy for BlackRock’s Retirement Solutions business, sat down with InvestmentNews Create to discuss the fund’s differentiated approach.  

InvestmentNews Create: Explain how BlackRock’s active target date fund approach is different from others.

Stacey Tovrov: The LifePath Dynamic strategy is built on over 25 years of lifecycle research to provide participants a consistent spending strategy in retirement. To help achieve this goal, the fund has the flexibility to combine multiple return drivers, including tactical views, shifting both its asset allocation and its active and index exposures as opportunities evolve within and across asset classes.

InvestmentNews Create: Why do investors need a tactical approach within their target date fund?

Stacey Tovrov: Many plan sponsors have large participant bases with relatively low retirement savings rates. One approach to help address a potential savings gap is through the additional return potential generated by active management. Employing active management can potentially increase returns, and, just as importantly, reduce the impact of volatility.

We believe most investors are interested in being more responsive to take advantage of what’s happening in the marketplace.  Our 2021 BlackRock DC Pulse Survey shows that 73% of participants think it is important to select options that offer the most growth. And plan sponsors agree. 

82% of plan sponsors believe an actively managed target date fund can help reduce the impact of volatility on plan participants.

But the average plan participant doesn’t have access to or can’t seek investment advice on a regular basis. With LifePath Dynamic, they can have access to the investment expertise of our dedicated investment team and risk management team who are monitoring markets day in and day out, making tactical adjustments to their portfolio for them. This flexibility helps us adapt to changing market environments, seeks to take advantage of market cycles, and provides the opportunity for higher risk-adjusted returns over time.

InvestmentNews Create: Tell us more about the asset allocation decisions. In which asset classes can the fund invest and are there limitations to the asset mix?

Stacey Tovrov:  Our LifePath strategic asset allocation (SAA) is consistent across the strategies we offer and includes deliberate and diversified exposures across equity, fixed income, and alternative asset classes. This includes exposures to U.S. and international equities across the market cap spectrum to seek growth We also maintain a high quality, core fixed income exposure to help offset equity risk and generate returns. Finally, the strategy includes a dedicated inflation hedging basket, including investment in US TIPS and global real estate. Even in LifePath Dynamic, the strategic asset allocation is still intended to be a long-term strategy for plan participants, so there aren’t big shifts in the asset mix. However, LifePath Dynamic seeks to generate alpha over the SAA by incorporating two complementary drivers of excess returns: active underlying funds and tactical views. We also have the flexibility to dial up or down the allocation to risk assets by 10% relative to our LifePath Index strategy. This allows the participant to take greater advantage of near-term market opportunities, and also dial down risk exposure when an asset class or specific position may appear more risky.

InvestmentNews Create: Tell us how you make decisions on when where to use active management within the target date fund?

Stacey Tovrov: Given the breadth of our investment platform, BlackRock is uniquely positioned to screen and select complimentary managers, making decisions on active and passive management to build diversified portfolios that seek to deliver excess returns more consistently. When it comes to selecting active managers, we’re looking for a proven ability to generate differentiated alpha. Consistency in excess return matters. For example, we can screen funds to see if they are generating alpha simply because they are leaning into a particular style factor. If that’s the primary driver of return, we can likely get that exposure more efficiently and cost effectively through a factor-based ETF.

Our Aladdin® risk management technology also plays a role in making the LifePath Dynamic Fund successful, ensuring we do not have overlapping exposure between managers in the fund. It gives us full visibility down to the security level to ensure we do not have an unintended overlap in exposures or risk.

InvestmentNews Create: How does BlackRock gauge whether its allocation decisions or choices about active management have been successful?

Stacey Tovrov: Since we already have our LifePath Index strategy that uses purely index funds to express the LifePath SAA, we have a transparent way to show plan sponsors, advisors, and plan participants how our tactical allocations and active management decisions are adding value.

And by seeking consistent delivery, net-of-fee excess returns, we are aiming to build a simpler, more secure retirement. That ties in well with BlackRock’s mission of helping more and more people experience financial well-being.

ⁱ BlackRock LifePath® Dynamic Retirement K performance versus index; Source: Morningstar as of 9/30/21. Reflects cumulative period between 12/1/2016 to 9/30/21. Returns are based on monthly net-of-fee returns. Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Refer to www.blackrock.com to obtain current month-end performance. Investment returns reflect total fund operating expenses, net of all fees, waivers and/or expense reimbursement. Total annual fund operating expenses, and net annual fund operating expenses including investment related expenses (total / net) as stated in the Funds’ most recent prospectus are: Retirement – 0.62% / 0.40%, 2025 – 0.66% / 0.40%, 2030 – 0.66% / 0.40%, 2035 – 0.69% / 0.40%, 2040 – 0.69% / 0.40%, 2045 – 0.73% / 0.40%, 2050 – 0.70% / 0.40%, 2055 – 0.74% / 0.40%, 2060 – 1.02% / 0.40%, 2065 – 1.14% / 0.40%. The Funds’ net annual operating expenses take into account fees which BlackRock has agreed to waive voluntarily. BlackRock may discontinue these voluntarily waivers at any time without notice.

The LifePath Funds may be offered as mutual funds. You should consider the investment objectives, risks, charges and expenses of each fund carefully before investing. The prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available, along with information on other BlackRock funds, by calling 800-882-0052 or from your financial professional. The prospectuses and, if available, the summary prospectuses should be read carefully before investing.

Investing involves risk, including possible loss of principal. Asset allocation models and diversification do not promise any level of performance or guarantee against loss of principal at any time, including at the target date. This material is not an offer to sell, nor an invitation to apply for any particular product or service.

LifePath Dynamic target date funds are invested mainly in U.S. and global stocks early on, shifting to more conservative investments, such as bonds, as investors get closer to retirement. The target date in the name of the fund designates the approximate year in which an investor plans to start withdrawing money. Typically, the strategic asset mix in each portfolio systematically rebalances at varying intervals and becomes more conservative (less equity exposure) over time as investors move closer to the target date. Investment in the funds is subject to the risks of the underlying funds. The principal value of the funds is not guaranteed at any time, including at and after the target date.

None of the information constitutes a recommendation by BlackRock, or an offer to sell, or a solicitation of any offer to buy or sell any securities, product or service. The information is not intended to provide investment advice. BlackRock does not guarantee the suitability of potential value of any particular investment. The information contained herein may not be relied upon by you in evaluation the merits of investing in any investment.

All funds may not be available at all firms. Prepared by BlackRock Investments, LLC, member FINRA. The LifePath products are covered by US patent 8,645,254. Other patents pending.

©2021 BlackRock, Inc. All Rights Reserved.

BLACKROCK and LIFEPATH are trademarks of BlackRock, Inc.

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