Manning & Napier’s Cunningham on Target Date Funds: The Weekend Interview

AdvisorOne: What is a glide path, and what is the issue at stake?

Cunningham: A glide path is the trajectory of asset allocation over time. For example, most glide paths are literally just that: a line or a curve that says, "If you're in a 2050 fund, today that 2050 fund will have 80% in equities. By the time we get to 2045, it will be closer to 25% in equities." It's a path that slowly gets more conservative the closer you get to retirement because a) you don't have the time to live through a big decline so you better be more conservative, and b) if you start to withdraw income, you have to dampen the volatility to provide for those withdrawals over the longest amount of time.

Every mutual fund company has a glide path based on "to or through," meaning some companies get to their most conservative asset allocation at the age of 65, or the target date. Some companies get to their most conservative allocation sometime after retirement; it could be six to 10 years after. Everyone approaches it differently. There were some 20 10 funds that had closer to 20% in equities, and others that had closer to 60% in equities in 2008 and 2009. So you had the same target date, yet a very different asset allocation. In 2008, you'd expect a 2010 fund to be fairly conservative. Some were conservative, but some were quite aggressive.

Everybody had a slightly different interpretation of what the glide paths should look like. The Senators are now saying, "Hey, come on, we need a lot more transparency. We need to see what the glide paths are!" When the SEC asked for comments, that's one of the first points they noted, and we wholeheartedly agree: Show the facts.

I think it's inevitable that there will be greater transparency about the target-date funds' glide paths. I also think that the government should not get into the business of telling people what their glide paths should be. That's not part of the regulations or what they put out for public review, but early in the discussion mandating the glide path was talked about.

Glide Path Transparency Is Essential

Advisor One: What kind of action do you expect to see the SEC take with its target-date rule proposal, and what kind of action do youwant the SEC to take?

Cunningham: There are two aspects of their guidelines that we strongly support. One is being open about the glide path, and two is being open about the underlying portfolios. Certain mutual fund companies have funds of funds, so in their target-date fund, the underlying investments are 25 different mutual funds. When you look at the mutual fund, you'll see that it holds 25 other mutual funds.

The question is, what are the underlying holdings of those 25 mutual funds? If XYZ mutual fund has 250 stocks in it, and ABC mutual fund in the same lifecycle fund has 300 stocks in it, let's see what those underlying stocks are. Don't just tell me I have a large-cap growth fund. Tell me what's inside all of those underlying funds. I can go to Morningstar and look up what the underlying holdings are, but the average investor can't do that. Believe me, it will be confusing, but for people who need and want to know, they will have the information to evaluate. Disclosure is important.

AdvisorOne: Why don't you think the government should regulate glide paths more closely?

Cunningham: Glide paths are constructed based upon long-term averages of markets. Manning & Napier has what we call a "glide range." For our 2030 fund, we can go anywhere from 40% to 70% in stocks at any point in time. For our target 2020, we have a glide range of approximately 36% to 68% of stocks. Our target 2010 can go anywhere from 20% to 60%. My point is that it's a fairly wide range.

For example, in March 2009, we were at the high end of the range because stocks were so cheap. There was such abject fear in the marketplace that we could pick up some of the best companies in the world at valuations that we hadn't seen in decades and probably will never see again for decades, whereas at the end of 1999 and into 2000, we were at the lower end of our ranges because everything was so expensive. The stocks we wanted to own weren't trading at a discount to their fair market value. We firmly believe that people who invest in lifecycle funds want risk management. They want someone who is going to protect their assets when things get ugly. The best way to do that is active asset allocation, being overweighted in stocks when they're cheap and underweighted when they're expensive.

Read more about the SEC's target date fund proposalat AdvisorOne.com.