Diversified growth funds should play a larger role within defined contribution (DC) pension schemes, while 'glide path' strategies, a prevalent retirement solution, do not always adequately perform, says BNY Mellon Investment Management.
Diversified growth funds, which are dynamically managed, can offer diversification in periods of extreme market stress when correlation between traditional asset classes breaks down.
Meanwhile, “mechanical” glide path investing – where investments are shifted in line with a person’s age and distance from retirement – does not adequately perform in a variety of market conditions and full market cycles, BNY Mellon says.
Glide path solutions are a form of “lifestyle” strategy and are particularly prevalent in the UK.
BNY Mellon makes the case for more emphasis by DC pension schemes on diversified growth funds in a paper – called Better DC outcomes by measure and design – and says the measure is important as the market undergoes “a deepening divergence between members’ retirement income expectations and reality”.
These funds could help trustees protect members’ savings whilst offering real levels of growth in a disciplined, risk-aware manner, says the asset manager.
“Extracting the benefits of diversification increasingly involves more sophisticated processes to capture the upside when markets are rising and avoiding the downside when they are falling or stressed,” says Catherine Doyle, head of defined contribution, UK at BNY Mellon Investment Management.
BNY Mellon maintains the various phases of the retirement lifecycle should be considered as a single journey with the flexibility to accommodate shifting retirement targets.
Doyle says diversified growth funds help members experience a smoother journey to retirement by providing the flexibility of achieving diversification throughout the lifecycle, progressing from the growth phase into the pre-retirement phase with the possibility of remaining invested in retirement in the decumulation phase.
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