PIMCO’s glide path for target date funds expresses the firm’s collective view on an age-appropriate asset allocation that aims to deliver successful retirement outcomes for defined contribution (DC) plan participants. Each year, we review the glide path formally to ensure it remains optimal, taking into account any recent modeling enhancements, changes in DC participant trends, and PIMCO’s latest views on asset allocation and valuations.

In this year’s update, on average, we reduced exposure to equity markets, particularly close to retirement, in favor of higher allocations to fixed income, while also refining sub-asset- class exposures based on relative valuations.

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, managing director, is lead portfolio manager on PIMCO’s RealPath Blend strategies and oversees the glide path leadership team.

Niels Pedersen and Sean Klein are executive vice presidents and senior members of the quantitative research team.

Q: What are the objectives of the PIMCO glide path?

Browne: Our glide path seeks to provide successful retirement outcomes for participants by managing the trade-off between the level of real retirement income and its volatility, or uncertainty. This requires balancing three key objectives: wealth maximization, return diversification, and retirement income hedging over the course of a participant’s savings journey. The result is a glide path that incorporates a diverse set of return drivers. For instance, PIMCO’s glide path has meaningful exposures to non-U.S. equities and spread sectors. It also has an explicit focus on mitigating real retirement income risk via greater exposures to real assets and “safe haven” long-term fixed income (see Figure 1).

Figure 1 shows how the composition of asset class exposures for the PIMCO glide path evolves to dial down risk as an individual approaches retirement age. For instance, 45 years prior to retirement, equities �� including U.S. large and small caps, non-U.S. equities and emerging market equities – compose 95% of total exposure. At retirement, this ratio drops to 40% as exposures to Treasury Inflation-Protected Securities, high yield bonds and other U.S. fixed income securities increase.

Q: How does the glide path review process work?

Pedersen: The annual process is rooted in PIMCO’s time- tested investment process, which for more than 50 years has managed risk and delivered returns across a wide range of market environments. The process starts with our Secular and Cyclical Forums in which PIMCO investment professionals debate and formulate outlooks for growth, inflation, potential risks, and opportunities across global economies and financial markets. (See our latest Cyclical Outlook, “Strained Markets, Strong Bonds.”) Next, PIMCO’s Investment Committee (IC) determines investment themes and portfolio risk factor targets, which form the basis of the firm’s updated capital market assumptions (CMAs).

The glide path team uses the CMAs and augments its analysis in light of retirement savings trends and modeling changes, if any, to seek an “optimal” asset allocation. The IC validates the proposed changes and, once satisfied, provides formal approval.

Q: Can you elaborate on how PIMCO’S CMAs guide the glide path process, and explain the major shifts that occurred this year?

Klein: As mentioned, one of the key inputs into our glide path review process is PIMCO’s long-term CMAs. They can be thought of as the “quantification” of our firmwide views over the secular (five-year) time horizon.

Following 2022’s historic sell-off in interest rates, PIMCO’s long-term return assumptions for fixed income increased materially relative to last year. For example, our five-year return assumption for U.S. core bonds jumped from 1.8% annually at the end of 2021 to 4.5% at the end of 2022. Within fixed income, spread levels appear slightly rich, implying less favorable risk/reward prospects for corporate credit relative to a year ago.

Equity risk premiums fell from 4%–5% last year to 1%–2% today, suggesting potentially lower longer-term returns. Return expectations for commodities increased despite recent strong returns. This is due in part to supply constraints and attractive carry potential given forward-curve pricing (see our Viewpoint, “Growing Demand, Tight Supply Support Commodities in 2023”).

Q: What are the major asset allocation changes this year?

Browne: In light of less attractive equity risk premia, the glide path’s average allocation to equities decreased by 2 percentage points, with the most notable reduction in vintages closer to retirement. The glide path’s equity landing point, for example, declined from 45% to 40% while allocations to equity and fixed income at early vintages were little changed, reflecting the greater importance of return maximization for younger participants (see Figure 2).

Figure 2 shows how the glide path’s equity exposure has diminished relative to the previous year. Equity exposure is 95% 45 years before retirement in the 2023 glide path, or 1.3 percentage points higher than it was last year. But equity exposure falls below the level of the year before beginning about 30 years prior retirement. At retirement, equity exposure in the 2023 glide path is 40.2% vs. 45.3% in the 2022 glide path. That difference continues for the 20 years after retirement.

There were also modest changes in sub-asset-class glide path exposures. Within equities, on a relative basis, developed market ex U.S. equities experienced the most notable decrease in exposure. We also implemented a small increase in exposure to emerging market (EM) equities given favorable valuations, due in part to a favorable return outlook for EM currencies.

Within fixed income, given the significant shifts in rate valuations since last year, we increased the interest rate sensitivity of the glide path, on average, especially near retirement. Additionally, we reduced exposures to spread sectors such as high yield and EM local bonds in favor of U.S. core bonds, given more attractive risk-adjusted return prospects. Given attractive pricing we also increased exposure to U.S. Treasury Inflation-Protected Securities (TIPS) on average across the glide path to help mitigate the risk of further upside surprises to inflation.

Lastly, we also reintroduced commodities, albeit as a relatively small 1% to 2% allocation across the glide path, given our constructive view on the asset class. Equally important, while commodities exhibit equity-like volatility on a standalone basis, we believe they can provide strong diversification benefits relative to traditional stocks and bonds as well as meaningful inflation-hedging qualities, especially in today’s environment. By adding commodities, and given other changes discussed above, we expect volatility of PIMCO’s glide path may potentially decline by roughly 0.5–0.6 percentage points for older participants.

Q: Does the process result in significant annual changes to the glide path?

Browne: Changes to key asset class risk factors tend to shift slowly, in line with the evolution of our long-term CMAs. Indeed, we consider this year’s enhancements to be modest. The ex ante tracking error (the expected difference in return volatility between the new glide path and the prior year’s) is between roughly 30 basis points and 115 basis points, depending on the vintage, reflecting the gradual and conservative nature of our year-over-year changes. At the same time, the changes are expected to help drive more attractive risk-adjusted returns. While shifts over time are intended to be modest, historically this process has consistently added value relative to a “set it and forget it” approach.

The authors thank Senior Advisor Steve Sapra for his contributions to this report

1 A “safe haven” is an investment that is perceived to be able to retain or increase in value during times of market volatility. Investors seek safe havens to limit their exposure to losses in the event of market turbulence. All investments contain risk and may lose value.
The Author

Erin Browne

Portfolio Manager, Asset Allocation

Niels K. Pedersen

Quantitative Research Analyst, Asset Allocation Research

Sean Klein

Head of Client Business Strategy – Client Solutions and Analytics

Related

Disclosures

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

A word about risk: 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. 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.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

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.

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.

The terms “cheap” and “rich” as used herein generally refer to a security or asset class that is deemed to be substantially under- or overpriced compared to both its historical average as well as to the investment manager’s future expectations. There is no guarantee of future results or that a security’s valuation will ensure a profit or protect against a loss.

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 LLC in the United States and throughout the world. ©2023, PIMCO.

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