March 28, 2024

Your Money: Pimco Retirement Funds Are Built for Skittish Times

When mutual fund companies start quoting Yoda while trying to persuade you to hand over your money, it’s a sure sign that something new is going on.

But Pimco, a bond specialist now selling the popular target-date retirement funds that blend stocks and bonds and become more conservative as you near retirement, would have you believe that it has a revolutionary approach to these funds, which populate most employers’ 401(k) and other plans.

Pimco believes we are experiencing a “new normal,” where markets in the future are much less likely to deliver the returns people remember from retirement investing in the 1980s and 1990s.

Plenty of people have ended up looking like idiots after declaring that this time is different, so it’s tempting to dismiss their proclamations as a lot of hot air. But Pimco has created its RealRetirement target-date funds with a strategy that appears to be custom-built for these skittish times. There’s less money in stocks, more inflation protection, hedging to protect against large losses and freedom for the Pimco fund managers to make bets on the fly.

For the period that began March 31, 2008, and ended in the middle of this month, Pimco’s funds for people retiring in 2020 and 2040 outperformed each of the big three in the target-date arena, Fidelity, T. Rowe Price and Vanguard, according to Morningstar data.

Still, the margin of victory over the next best-performing fund was less than one-quarter of a percentage point annually in both cases. And as Yoda himself might put it, three years of returns matter not when worried you are about many decades of future.

That outperformance is something, though. So it’s worth a peek under the hood to see what Pimco is up to.

But first, how did we get here? Target-date funds grew out of the utter lack of preparedness that many people felt when employers left pensions and made workers pick investments in a 401(k).

“People were given investment discretion when they didn’t want it,” said Joe Nagengast, a principal at Target Date Analytics, a research and consulting firm that does not work with Pimco but would like to someday. “The way to address that was to put everyone in these broad age buckets and say, ‘For investment management purposes, we’re not insulting your individuality but if you’re 25, you are the same as every other 25-year-old.’ ”

So a 25-year-old today can invest in a 2050 fund with a high allocation of riskier assets like stocks. Over time, the fund would gradually switch to bonds and other more conservative investments that can reduce risk as retirement looms.

Pimco introduced some of its target-date funds right before the stock market fell to pieces in 2008, which dragged down many other companies’ 2010 and 2015 target-date funds that had a lot of money in stocks. What Pimco had surmised was that one big loss near retirement would set many retirees back so far they’d have difficulty recovering. So it wanted to try to protect people from that.

“You only get one shot to do this properly,” said Vineer Bhansali, the Pimco managing director who oversees the investment strategy behind the target-date funds. “Most participants don’t worry so much about marginal underperformance as they do about underperforming significantly on the downside.”

Mr. Bhansali has a Ph.D. in particle physics from Harvard, did time in the trenches on Wall Street and is qualified to fly all sorts of airplanes even when he can’t see 100 feet in front of him. But he has no instruments for predicting returns, and he worries about once-in-a-while calamities like hyperinflation. “We believe that just like losing your money to someone who doesn’t pay you back is a very immediate threat to your capital, so is a loss of buying power,” he said. “It’s the same thing. You can’t buy stuff that you need.”

One way Pimco tries to avoid that possibility is by gradually moving as much as 35 percent of the target-date portfolio to TIPS, which are United States Treasury bonds with built-in inflation protection. To avoid outsize stock market risk, Pimco’s targets for its stock allocation are never higher than 55 percent.

Another big difference here are the hedges that Pimco has in place to protect against a collapse in the stock market. By using various complex tools, Pimco sets a maximum loss it is willing to tolerate. For a fund with a retirement date that is relatively soon, it wants no more than a 5 percent loss; for a retirement date that is much further away, it may be willing to suffer a 15 or 20 percent decline, though the targets can move some.

Article source: http://feeds.nytimes.com/click.phdo?i=9f4014872f97366d9bf8efbb5a7110e9

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