A new generation target date strategy for investors to shape their projects

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Perspectives (P): Why do you consider target date offerings are well-suited to allow investors to shape their projects?

Anne Poirrier-Hamon (APH): In life, there are a certain number of foreseeable events which have become increasingly important to prepare for ahead of time. These projects typically include funding our children’s education, real-estate projects and retirement. Given the fall of the replacement rate provided by public pensions as well as the progressive switch from defined benefits to defined contributions, the question of maintaining one’s lifestyle after retirement has become a major concern for most individuals. One common factor for these different projects is that their timeline can more or less be anticipated. This is precisely what makes target date offerings relevant to investors: based on their explicit reference to a given date, they allow a straightforward choice for the investor, taking into account their specific project horizon. The significant size of the Northern American target date funds market as well as their ‘default option’ status within the 401(k) is a good illustration of this fit.

Charles Alberti (CA): We believe several features need to be taken into account for a target date offering to truly meet investors’ needs in preparing for their projects or retirement. Firstly, offering a range of target date funds is essential to cover investors’ mid to long-term projects. Moreover, they need to remain open up until their maturity date, in order to allow investors to save at their own pace through regular investments, as well as to retrieve their capital ahead of the target date if needed. Last but not least, investors expect, of course, target date funds to offer upside potential for their capital to grow with risk-taking calibrated according to a specific time horizon, but also some type of protection to give them visibility on what they can expect making them fully aware of the risk of market turbulence.

P: There are already a number of target date funds on the market. Why the need for a new offering?

APH: There are indeed a wide number of target date offerings already on the market. They typically break down into two types:

On the one hand, the widest number of target date funds follow a de-risking approach over time, often called a ‘glidepath’: an investor’s portfolio will typically start out heavily invested in equities when they are far away from retirement, and will be re-balanced progressively over time towards a more significant share of fixed-income instruments. Investors do not benefit from any type of formal protection in such offerings, which can be a blocking point for some of them, especially after drawdown experiences in 2008.

On the other hand, some target date funds offer a formal protection at maturity representing 100% of the highest Net Asset Value (NAV) reached by the fund over its lifetime. In this case, protection is clearly provided, but with the risk of sacrificing upside potential in low-interest rate environments such as the one we have been experiencing over the last few years: the protection is indeed excessively ambitious, and the risk is that no room will be left to take any risk due to monetisation. It is also worth noting that a 100% protection would on the contrary not be worth much for investments occurring in a hypothetical context with higher interest rates and inflation.

CA: This observation was precisely the starting point for us in designing the new target date strategy: at BNPP IP we consider that investors should not have to choose between upside potential and protection when saving for their projects and retirement. So we brought together our experts from THEAM and BNPP IP’s Marketing, Innovation & Research teams in order to come up with a new generation of target date solutions, aiming to solve the previous dilemma.

P: How is BNPP IP’s new strategy well-suited to combine upside potential and protection?

CA: BNPP IP’s new target date strategy incorporates two main investment innovations, backed by proprietary research.

On the one hand, a paradigm shift has been introduced as far as the protection mechanism is concerned, capitalising on THEAM’s extensive and long-standing experience in protected investment solutions, managing around EUR 16.3 billion[1] in this field. We have moved away from the ‘one size fits all whatever the interest rates’ 100% capital protection towards a more adaptive protection taking into account the interest rate context as well as the time remaining to maturity at the time of the investment. This results in a formal protection of more than 100% of the capital invested when possible without sacrificing upside potential (typically for investments occurring on longer-dated solutions and/or in higher interest rate contexts) and below 100% when needed to leave room for upside potential.

On the other hand, the risky part of the portfolio (completing the low-risk part ensuring protection at maturity) is invested in two performance engines, which we believe are unique and complementary. The directional engine, aimed at capturing risk premiums over the long term, offers a well-diversified exposure to financial markets with a risk-managed leverage. The non-directional engine incorporates THEAM’s multiple alpha strategies, aiming to offer a positive return whatever the market context. Combining these two engines allows our target date strategy to be well-prepared to face different market conditions.

APH: These innovations should allow each investment to benefit from a relevant trade-off between upside potential and protection based on the market context at the time of the investment. As a result, this solution is particularly well-adapted to regular investing, the most common pattern for individuals to prepare for an important life project.

P: What is the value proposal for the end investor with the new strategy offered by BNPP IP?

CA: The investor has the possibility to choose the best-suited solution amongst the range of eight solutions offered by BNPP IP, dated from 2018 to 2043, and to apply the savings pattern of their choice as the strategies remain open up until maturity. The investor can expect their capital to grow over time thanks to the two well-calibrated performance engines. In addition, the investor is given clear information on the minimum capital they will receive for their project, thanks to a value formally protected by the BNPP Group at the maturity date, which can only increase over time. For example, a 35 year-old individual preparing for his retirement in 25 years could, for an investment of EUR 10 000 in current market conditions, expect EUR 28 200 on average[2], and count on a formally-protected minimum value of EUR 10 300 in 2038. For the same investment of EUR 10 000 in a higher interest-rate context (let us consider the conditions seen in 2009 as an example) he could expect an average of EUR 51 000 and benefit from a formal protection of EUR 17 800 twenty five years later.

APH: Because we are fully aware of the importance of accompanying investors, we have developed various interactive tools, including a web-based simulator allowing advisors to calibrate their savings effort in order to shape their projects.

Find more information about BNP Paribas Plan Easy Future.

[1] As of 31/12/2013

[2] Based on simulations. These simulations have no contractual value. These simulations have a strictly informative purpose, with neither express nor tacit guarantee relative to the achievement of the performance objective.

Charles Alberti

Investment specialist, THEAM

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