Erin Browne, Portfolio Manager, Multi-Asset Strategy: In the first quarter, plan participants were hit with the worst quarter ever for the S&P 500, with the S&P declining nearly 30 percent and volatility spiking to levels above that which we saw during the global financial crisis. As a result, while we saw net inflows into the target-date funds, for those vintages closest to retirement, we actually saw net outflows.
Text on Screen: What has been the impact?
Amongst some vintages, particularly the 2025 vintage, we saw plan participants get hit hard, in some cases, declining as much as 25 percent from peak to trough.
As a result, we saw some plan participants get spooked by the extreme market volatility and move into core bonds, into cash, into stable value, which provided more of a safe haven asset for those plan participants.
In defined contribution more broadly, we also saw significant asset allocation shifts, with a move into stable value, with allocations increasing from 10 percent to 13 percent, and a move out of large-cap equities, with a decline from 25 percent to 24 percent.
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PIMCO has a really different approach to the way that we think about glide path construction and asset allocation in our target-date suite of products.
We typically underweight traditional equity beta in our portfolio and overweight hard duration, or long bonds, as an example, as a way to provide a market shock absorber during periods of extreme market moves, and this served us well in our suite of products in the first quarter of 2020.
With a nearly 30-percent drawdown in the S&P 500 in the first quarter and volatility spiking to levels above that which we saw during the global financial crisis, PIMCO’s explicit downside risk mitigation program also offered an additional layer, or cushion, for those plan participants closest to retirement.
Text on screen: What’s Next?
We believe that defined contribution plans are going to be reviewing their target-date offerings and really thinking about appropriate risk mitigation as well as how to construct their asset allocation and their glide path philosophy.
What we saw really emerge in the first quarter is that during significant periods of market volatility, plan participants are really apt to focus on the short term, and not focused on their long-term goals and objectives.
And we think it’s really important that plan sponsors and advisors
Text on screen: How can advisors help plan participants now?
help their plan participants now, and that can be done in three ways. First, we think it’s important that plan sponsors and advisors focus their participants on their long-term goals and objectives.
Secondarily, portfolio construction and asset allocation really matters, so reviewing the portfolio construction, is important. And then, understanding what the risk measures are in the portfolio. This is the point in time when risk really matters, and being able to understand those risks can have meaningful implications for the portfolio.
We think that the next 10 years are going to look dramatically different than they have over the preceding 10 years, and that’s largely a result of higher starting points for valuations as well as a lower growth environment over the secular horizon.
We know this is a really difficult time for plan participants, for sponsors, as well as for advisors, and we really want to thank you for your faith in PIMCO, as well as your partnership with us, as we navigate these turbulent markets.
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