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July 2017

A Different Way of Investing: What Makes American Funds Target Date Retirement Series Special

American Funds Target Date Retirement Series® celebrated its 10-year anniversary this year. In this video, Jim Lovelace, member of the Portfolio Oversight Committee, and Rich Lang, target date investment specialist, share their thoughts on:

  • Why the series was designed with above-average equity exposure.
  • The three-pronged approach to reducing market risk volatility.
  • How the role of the Portfolio Oversight Committee differs from a more traditional portfolio manager.
  • The funds’ asset class flexibility as market conditions change.
  • What investors might see over the next 10 years in financial markets.

Video

Featuring

Craig Duglin, Senior Vice President, DC Product Management
James B. Lovelace, Portfolio Manager
Rich Lang, Investment Specialist

Transcript

Craig Duglin: Craig Duglin, senior product manager in our investment services area, delighted to be joined by Jim Lovelace and Rich Lang. Jim is a member of the Portfolio Oversight Committee on our American Funds Target Date Retirement Series and has been since its inception. And Rich Lang is one of our target date investment specialists, also with the series since its inception. Delighted to have you today.

Jim, there have been very few changes since we launched the series. And I know one of them was a little above average equity relative to the peers. A lot of other providers have come around to our point of view. What were you thinking when you decided with the team to introduce the series with slightly higher equity?

Jim Lovelace: Well, when we were designing the series, we had in mind the timeframe of a retiree. At 65, you can really expect to live 25 or 30 years. And that timeframe really calls for some form of equity investment. The challenge, of course, was managing the risk for a retiree of investing in equities. But that there should be equities seemed really natural to us. And how we could get as much equity into these portfolios in a nonvolatile way, that was really the main challenge that drove the process of designing the funds.

Rich Lang: It was important to focus on the longevity risk and you need meaningful equity to last a 25- or 30-year distribution. But our objective-based approach allows us to reduce the volatility of our equities compared to other providers. And I think that’s an advantage of our series. When we go out and we talk to plan sponsors and consultants, I think that’s the thing that really resonates the most regarding our target date series — the fact that we reduce equity, we change the types of equity, to get at that market risk/volatility. And then we do the same within fixed income. So, we really take a three-pronged approach in reducing that market risk. And I think that is a key differentiator of our series.

Craig Duglin: Jim, how would you describe the role of the Portfolio Oversight Committee? And importantly, how is that different than being a portfolio manager on one of the underlying funds?

Jim Lovelace: It’s a very different structure from what people expect. We are not trading funds. We really set in motion a plan, with these funds doing very specific roles. So, what we are doing on a day-to- day basis is just making sure that the funds are doing what we planned for. In a way, it’s not like a portfolio manager with a portfolio of stocks. It’s more like our multiple manager system in that the series itself is composed of multiple funds, each pursuing their own strategies, very similar to The Capital SystemSM that uses multiple managers in each fund.

Craig Duglin: I suspect you have a general framework of exposure to the major asset classes: stocks versus bonds, U.S. versus non-U.S. How do you apply that general framework to what you just described?

Jim Lovelace: So in the architecture, there is this basic idea that at different stages of one’s life, one should have different exposure to equities and bonds, but the environment does change. So, there’s a certain amount of variability across the series because some of the funds have the ability to shift the assets. It’s not a major variability, but it allows the market to be sensitive to different market conditions.

Rich Lang: I think that gets back to the fact that we use global funds and multi-asset funds in our target date series. And a lot of providers want to stick regionally pure or maybe asset-class-pure funds. And the fact that we use those types of funds, you’re going to get the flux in U.S./non-U.S. equities or the stock/bond allocation over time.

Craig Duglin: So, what gives you both confidence that these results can persist in the future?

Jim Lovelace: What gives me confidence is the track record of the Capital Group itself and the fact that as an organization, we’re built to be able to deliver results consistently over a long period of time. We’ve done it for 80 years. The multiple manager system, The Capital System, allows for smooth transitions and management over time so that the funds themselves maintain their character over long periods of time. We’re dedicated to long-term investment results.

Rich Lang: Yeah. Particularly in an investment-type vehicle, a target date investment, in which people are saving for retirement which could be 30 or 40 years away, I think this long-term approach that we take really puts us at a competitive advantage compared to other providers.

Craig Duglin: So, there’s a lot of debate right now about forward-looking capital market expectations. As you think about the next 10 years, what are you expecting in terms of equity versus bond market returns? And does that different point of view from the last 10 years impact how you’re thinking about the American Funds Target Date Retirement Series?

Jim Lovelace: When I look ahead as an investor, it’s important not to be too invested in any one outlook. The market always has a way of surprising you. The Capital System takes that into account for each of our funds. The target date series, I think, is also structured to weather either a strong market or a weak market, whatever it is. I think we keep in mind that the future really is very difficult to predict.

It’s more likely that the next 10 years, we’ll see more volatility than we’ve seen over the last seven or eight years. We haven’t really had a major market setback since the great financial crisis of 2008–2009. So a bear market is someplace in the future, and then the series will be really tested. But, I think we’re set up to handle that, or a stronger market, too.


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. 

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 not to be comprehensive or to provide advice. 

Past results are not predictive of results in future periods.