On the heels of revamping its lifecycle indexes, a major U.S. fund provider said Monday it was jumping on board of Dow Jones' latest benchmark for use in new products.
PIMCO has picked the Dow Jones Real Return Target Date Indexes to serve as the benchmark for its RealRetirement set of funds.
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.
The Dow Jones Real Return Target Date Indexes are designed to serve as benchmarks for so-called lifecycle portfolios. Those typically start with aggressive mixes of stocks, bonds and other asset classes. Later, as the target date for when a fund's investment horizon nears, that mix becomes much more conservative.
Target date funds are getting a lot more attention as a result of the Pension Protection Act of 2006. It allows lifecycle funds to be used as default options in 401(k) plans.
"The Dow Jones Real Return Target Date Indexes are the best-suited barometers for the growing number of active lifecycle funds that allocate to a highly diverse mix of assets and have a focus on the portfolio's 'real' return. PIMCO's decision to benchmark their new funds to these indexes affirms our continued leadership in providing comprehensive and meaningful measurement tools for the target date investment community," said Michael Petronella, president of Dow Jones Indexes, in a statement.
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.
"With the proliferation of target date strategies and investment products in recent years, we believe that benchmark selection is an important step in launching our own target date funds," said Bob Greer, PIMCO's Real Return product manager, in a statement. "The indexes' focus on inflation protection and use of real assets also were key criteria in our decision."
Launched last month, the Dow Jones Real Return Target Date Indexes comprise 11 indexes, nine with target dates in five-year intervals out to 2045, plus a Dow Jones Real Return 40+ Index and Dow Jones Real Return Today Index. Each index in the series represents a mix of subindexes representing stocks and bonds, TIPS as well as commodities and real estate, which potentially counterbalance inflation.
The component asset classes are weighted within each Dow Jones Real Return Target Date Index to measure a targeted level of risk. Stocks and bonds are classified as nominal assets with high- and low-risk profiles. Real estate securities and commodities are considered real assets with high-risk profiles, and U.S. TIPS are considered real assets with a low-risk profile, according to Dow Jones Indexes.
Over time, the weights are adjusted based on predetermined formulas to adjust the risk level systematically as the index's target date approaches. For example, the Dow Jones Real Return 2045 Index includes approximately 90% component allocation to the high-risk assets (equities, real estate and commodities). When the index reaches its target date, the index composition will have changed to about 70% in the low-risk component assets (bonds, U.S. TIPS).
The index will then convert into the Dow Jones Real Return Today Index, which maintains constant exposure to the conservative asset allocation.
The equity, real estate securities and bond portions of the Dow Jones Real Return Target Date Indexes are weighted by market capitalization. The indexes are reviewed on a quarterly basis.