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Glide path and dynamic asset allocation of target date funds

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Abstract

The glide path of typical target date funds is based on the relatively simple assumption of risk. If an explicit term structure of risk is present or risk is time-varying, the conventional glide path may not be adequate to fulfil the purpose of target date funds. We introduce a new approach to define the glide path of target date funds. Our starting point is to determine the level of risk budget for each target date. According to the pre-defined risk budget, we derive the asset allocation of target date funds by explicitly incorporating the current term structure of risk. As risk does change through different market phases, we implement a dynamic asset allocation strategy for target date funds that considers simultaneously both the pre-defined risk budget and the prevailing market risks. The main difference is that at any given time our risk-controlled dynamically rebalanced target date funds would not exceed the pre-defined risk budget regardless of market movements.

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Notes

  1. Institutional Investor, March 2009, reports that the asset of target date funds has reached $ 185 billion.

  2. VIX is the volatility index, which is the key measure of market expectations of near-term volatility conveyed by S&P500 index option prices traded in CBOE. The index is a leading barometer of investor sentiment and market volatility. ML MOVE index is compiled by Merrill Lynch based on the weighted average of implied volatilities of 1-month Treasury options on the 2-year, 5-year, 10-year and 30-year US Treasury securities expressed in basis points (with a total weight of 40 per cent on the 10-year Treasury and total weights of 20 per cent each on the other maturities).

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Authors and Affiliations

  1. BAY Investment, Mergenthalerallee 77-81, Eschborn, 65760, Germany

    Youngjun Yoon

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  1. Youngjun Yoon
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Correspondence to Youngjun Yoon.

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Yoon, Y. Glide path and dynamic asset allocation of target date funds. J Asset Manag 11, 346–360 (2010). https://doi.org/10.1057/jam.2010.20

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  • DOI: https://doi.org/10.1057/jam.2010.20

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