PIMCO’s glide path for target date funds expresses the firm’s collective view on age-appropriate asset allocation that can help prepare defined contribution (DC) plan participants for successful retirements. The glide path is reviewed annually based on the latest information on asset valuations, modeling enhancements, DC savings trends, and PIMCO’s asset allocation views. The new 2022 glide path has a slightly higher allocation to equities, and a lower exposure to long duration and core bonds.

In the following Q&A, senior members of PIMCO’s glide path leadership team discuss the key objectives, investment processes, and results from our recently concluded review. Erin Browne is a managing director and asset allocation portfolio manager who oversees the glide path team. Steve Sapra and Niels Pedersen are executive vice presidents and senior members of PIMCO’s quantitative research team.

Q: WHAT ARE THE OBJECTIVES OF THE PIMCO GLIDE PATH?

Browne: Our glide path aims to balance the key objectives of wealth maximization, diversification, and retirement income. The glide path’s asset allocation seeks to optimally balance the trade-off between inflation-adjusted retirement income and income volatility. To achieve sufficient retirement income, a portfolio should generate adequate risk-adjusted returns over the long term and use a diverse array of investments to realize robust outcomes across a variety of economic conditions (see Figure 1).

Figure 1: PIMCO’s 2022 glide path

Figure 1: PIMCO’s 2022 glide path

Q: HOW DOES THE GLIDE PATH REVIEW PROCESS WORK?

Pedersen: The annual glide path review process is rooted in PIMCO’s overall investment process, and benefits from the firm’s over 50-year history of managing risk and delivering returns across a wide range of market environments. The process starts with our secular and cyclical forums, where PIMCO investment professionals debate and formulate our outlook on growth, inflation, risks, and opportunities across the globe. We also invite outside experts to help us avoid blind spots and mitigate biases. (See our January Cyclical Outlook.)

Next, PIMCO’s Investment Committee (IC) refines and translates forum conclusions into investment themes and portfolio targets. The glide path team incorporates the IC’s views as well as analyses of defined contribution savings trends, modeling enhancements, and asset class valuations. This year we also discussed rebalancing frequency given market volatility, and reconfirmed the value of our monthly approach. We also conducted our quarterly review of the underlying funds and all passed their screens.

As in prior years, PIMCO’s IC provides final approval, and any glide path changes are recorded and monitored over time to assess their efficacy and to continuously improve the process.

Q: CAN YOU ELABORATE ON HOW ASSET ALLOCATION VIEWS AND CAPITAL MARKET ASSUMPTIONS GUIDE THIS PROCESS?

Sapra: One of the key inputs into our glide path modeling process is PIMCO’s long-term capital market assumptions (CMAs). The CMAs can be thought of as the quantification of our firmwide views emanating from the forums. Synthesizing our long-term estimated returns with the most current data – on household savings and balance sheets (including housing wealth), savings and contribution rates, employer matches, and Social Security benefits – allows us to produce a glide path that we believe reflects the current behavior of participants and plan sponsors as well as our views on how asset class returns are expected to evolve in the future.

Given higher levels of government bond yields, our CMAs for core bonds have gone up, from around 1% a year ago to 1.8% today. However, credit spreads are meaningfully tighter than this time last year, implying that the incremental return to assuming credit risk is low, but still positive. Given the significant widening of inflation breakevens in 2021, reflecting the market’s view of higher inflation going forward, we find Treasury Inflation-Protected Securities (TIPS) and long TIPS are now priced roughly in line with their nominal counterparts.

This is a change from this time last year, when we viewed TIPS as more attractive than nominal bonds. Given the prospects for relatively high earnings growth, we view equities as somewhat attractive today. Our estimated return for large-cap U.S. equities is 6%, or 4.7 percentage points over our average cash rate estimate of 1.3% annually over the next five years.

Q: WHAT ARE SOME OF THE MAIN ASSET ALLOCATION CHANGES THIS YEAR?

Browne: Given the attractive equity risk premium Steve described, the average allocation to equities along the glide path increased by 1.6 percentage points, more notably in the middle vintages. At retirement, we view the 45% equity exposure as striking the right balance between growth potential and the need to limit downside risk; hence, exposure was unchanged (see Figure 2). There were changes in the underlying components as well: We increased exposure to U.S. large-cap and international equities across the glide path, lifted exposure to emerging market equities for allocations further from retirement, and reduced exposure to U.S. small-cap equities and U.S. real estate investment trusts (REITs) across the glide path.

Figure 2: A slight increase in equity exposure

Figure 2: A slight increase in equity exposure

On the fixed income side, we slightly reduced exposure to U.S. core bonds and long-term U.S. fixed income (long Treasuries and long TIPS) across most allocations in favor of emerging market bonds and global bonds. As a result, duration (interest rate sensitivity) declined between 0.1 years and 0.5 years depending on the vintage.

Q: INFLATION IS TOP OF MIND FOR MANY INVESTORS. HOW IS THE GLIDE PATH SEEKING TO MITIGATE RISK IN PORTFOLIOS?

Sapra: It’s not just about the amount of money at retirement, but one’s ability to maintain real purchasing power, thus preserving one’s standard of living in ”the golden years.” Real assets, or assets that tend to be correlated to changes in inflation, may provide some essential inflation mitigation. Examples include TIPS, foreign currencies (which hedge import prices), and REITs. However, it’s important to consider not just an asset classes’ inflation properties, but how those attributes are valued today.

Breakeven inflation has increased considerably and is now generally in-line with our long-term inflation views. As such, as Erin noted, we’ve reduced our exposure to TIPS and long TIPS this year. However, our glide path at retirement still has an 18% allocation to these real assets – almost double the allocation in many other glide paths. Thus, while we view certain real assets as marginally less attractive today than we did a year ago, our process is designed to seek to maximize and preserve inflation-adjusted retirement income (see Figure 3).

Figure 3: Exposure to real assets has declined but remains above average

Figure 3: Exposure to real assets has declined but remains above average

Q: DOES THE PROCESS RESULT IN SIGNIFICANT YEAR-ON-YEAR CHANGES TO THE GLIDE PATH?

Pedersen: We generally expect changes to the balance of return-seeking and income-producing assets to shift slowly year-over-year, in line with the evolution of our long-term CMAs. This year’s modest glide path enhancements were consistent with that. The ex ante tracking error (the statistical difference between the new and the prior year’s glide paths) this year was no more than 0.75%, depending on the vintage, reflecting the gradual and conservative nature of our year-over-year changes. However, the magnitude of the changes ultimately depends on PIMCO’s views on asset market valuations and macro regimes. If macro conditions and valuations shift substantially from the prior year, the change in the risk allocation toward exposures that are deemed more attractive could be larger.

For more details on our glide path construction and modeling processes, please see our Viewpoint, “The PIMCO Glide Path Construction Process”.

The Author

Erin Browne

Portfolio Manager, Multi-Asset Strategies

Niels K. Pedersen

Quantitative Research Analyst, Asset Allocation Research

Steve Sapra

Client Solutions & Analytics

Related

Disclosures

Past performance is not a guarantee or a reliable indicator of future results.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Certain U.S. government securities are backed by the full faith of the government. Obligations of U.S. government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. High yield, lower- rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be suitable for all investors. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. Diversification does not ensure against loss.

Glide Path is the asset allocation within a Target Date Strategy (also known as a Lifecycle or Target Maturity strategy) that adjusts over time as the participant’s age increases and their time horizon to retirement shortens. The basis of the Glide Path is to reduce the portfolio risk as the participant’s time horizon decreases. Typically, younger participants with a longer time horizon to retirement have sufficient time to recover from market losses, their investment risk level is higher, and they are able to make larger contributions (depending on various factors such as salary, savings, account balance, etc.). Generally, older participants and eligible retirees have shorter time horizons to retirement and their investment risk level declines as preserving income wealth becomes more important. It is not possible to invest directly in a glide path.

Target Date Funds are designed to provide investors with a retirement solution tailored to the time when they expect to retire or plan to start withdrawing money (the “target date”). Target Date Funds will gradually shift their emphasis from more aggressive investments to more conservative ones based on their target dates. Target Date Funds invest in other funds and instruments based on a long-term asset allocation glide path developed by PIMCO, and performance is subject to underlying investment weightings, which will change over time. An investment in a Target Date Fund does not eliminate the need for an investor to determine whether a Fund is appropriate for his or her financial situation. An investment in a Fund is not guaranteed. Investors may experience losses, including losses near, at, or after the target date, and there is no guarantee that a Fund will provide adequate income at and through retirement.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

PIMCO Capital Market Assumptions (CMAs) for indices and asset class models, return estimates are based on product of risk factor exposures and projected risk factor premia which rely on historical data, valuation metrics and qualitative inputs from senior PIMCO investment professionals. Equities is based on the S&P 500 Index. Return assumptions are for illustrative purposes only and are not a prediction or a projection of return. Return assumption is an estimate of what investments may earn on average over the long term. Actual returns may be higher or lower than those assumed and may vary substantially over shorter time periods.

Breakeven inflation rate (or expectation) is a market-based measure of expected inflation or the difference between the yield of a nominal and an inflation-linked bond of the same maturity. Correlation is a statistical measure of how two securities move in relation to each other. Tracking error measures the dispersion or volatility of excess returns relative to a benchmark. A tracking error whose calculations are based on a forecasting model is called an ex ante tracking error.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2022, PIMCO.

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