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How Target Retirement Funds work

06 January 2017 | Portfolio construction

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Target Retirement Funds differ from other multi-asset funds in a number of ways. And it's these differences that can help advisers help their clients reach their retirement goals.

I'm Ankul Daga, investment strategist at Vanguard. Let me explain some of these differences today.

The first is asset allocation. When we talk about this, we mean the mix of equities and bonds in a portfolio. For target retirement funds, this mix changes over the life of the fund. And it's known as the glide path.

The thinking underlying the glide path is based on the human capital concept. Early in our careers, when we first start working, we have a lot of human capital but often little financial capital. We know we'll be working and earning an income over many years. And the stability of this income stream means we can take on significant risk in our savings and investments. This translates to a large exposure to equities in the first twenty or so years of the fund, if we assume we start saving in our early to mid-20s.

Now as we get closer to retirement, we've built up more financial capital, we start introducing more bonds for their stability and risk reduction. At this stage, capital protection becomes increasingly important to cope with market downturns. We also add inflation-linked bonds to help protect against the rising cost of living. But we still keep some exposure to equities for growth.

This is another difference in these funds. They take the saver through retirement not just to retirement. In retirement, we continue to reduce risk but we maintain some opportunity for growth. This blend of assets reflects the range of choice people have, now that we are no longer compelled to buy an annuity.

The main point for advisers is that the fund's asset allocation is aligned with the investment objective, rather than an investor's risk tolerance. And this really is a different way of thinking – especially for advisers and their clients used to making decisions and profiling risk on a 5-10 year time horizon.

For retirement, the time horizon can be in the region of 70 odd years! These funds are designed to help people from age 25 to 95 and beyond. Target retirement funds are absolutely aligned to clients' specific investment goal of retirement with that long-term horizon and appropriate risk taking baked in.

Using Target Retirement Funds means advisers can focus more on building enduring, long-term relationships with their clients.

Thank you for watching.

Important information:

This video is directed at professional investors and should not be distributed to, or relied upon by, retail investors.

This video is designed for use by, and is directed only at, persons resident in the UK. It is for educational purposes only.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

The opinions expressed in this article are those of the individual speaker and may not be representative of Vanguard Asset Management, Ltd.

Issued by Vanguard Asset Management, Ltd, which is authorised and regulated in the UK by the Financial Conduct Authority.

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