New versions diversify to add more asset classes.
With life cycle and target date retirement funds so hot these days with fund investors, it's little wonder that Dow Jones has decided to revamp one of the category's oldest contenders.
In 2001, well before Congress made changes favoring target-date types of investment vehicles, Dow Jones launched the Dow Jones Target Date Indexes which included allocations for stocks, bonds and cash. The series featured both international and domestic flavors.
Last week, the index provider followed up with a new and improved series that will be calculated alongside the original index series. Besides the former three asset classes, three others were added: real estate, Treasury inflation-protected securities (TIPs) and commodities.
That follows a trend by other index providers and fund advisors in the past few years to diversify target date products.
Target date funds, of course, are getting a lot more attention as a result of the Pension Protection Act of 2006. It allows life cycle funds to be used as default options in 401(k) plans.
The Dow Jones Real Return Target Date Indexes now allocate assets among various subindexes covering stocks, bonds, real estate, commodities and TIPs.
Stocks are represented by the Dow Jones Wilshire Global Total Market Index, while the DJ-AIG Commodity Index and the Dow Jones Wilshire U.S. Real Estate Securities Index represent commodities and real estate. Low-risk asset groups include U.S. nominal bonds, represented by the Lehman Brothers U.S. Aggregate Bond Index; and TIPS, represented by the Lehman Brothers U.S. TIPS Index. The TIPS have replaced what would normally be the cash allocation.
"As more plan sponsors pursue target date strategies in light of the Pension Protection Act, market participants require more choice when selecting their benchmarks. The Dow Jones Real Return Target Date Indexes are differentiated because they include a diversified mix of asset classes as well as measure inflation-adjusted performance, or the ‘real' return, of a target date portfolio," said Dow Jones Indexes President Michael A. Petronella.
With the addition of commodities and real estate, the series delves into two areas that have been in the public eye lately as investors seek further sources of diversification.
The commodities market and the overall real estate market tend to perform differently from stock and bond markets, offering uncorrelated returns. Most life cycle funds offer exposure to just stocks, bonds and cash. The addition of these new asset classes means that the index family will be reflecting returns from a broader and more diversified base.
Eleven indexes are calculated with the weightings of high-risk versus low-risk assets adjusted over time to reflect different risk-return profiles; the longer an index has before it reaches its target date, the higher the allocation to high-risk assets.
Nine of the indexes represent different target dates set at five-year intervals ranging from 2005 to 2045. The Dow Jones Real Return Today Index reflects the allocation of a portfolio that has hit its maturity date; it and the Dow Jones Real Return 2005 Index have allocations between high-risk and low-risk assets of roughly 28% and 72%.
The Dow Jones Real Return 40+ Index represents the allocation for maturity dates that are more than 40 years in the future; it has an allocation of roughly 89% to high-risk assets and 11% to low-risk assets.
Target date or life cycle funds are a small and rather self-selecting group, but the modifications to the new Dow Jones index family offer a point of differentiation.
While advisors and consultants push for more diverse asset classes in target date investment vehicles, not everyone agrees on just which ones are the most appropriate.
Debates continue to rage over whether commodities and real estate should be treated as separate asset classes within a portfolio or even over whether they have a place in a diversified portfolio; however, in adding the Dow Jones Real Return Target Date Indexes to its target date indexes family, Dow Jones has at least opened up the possibility to investors and plan advisors.