Investor Knowledge
June 27 2024

Incorporating Alternatives into Target Date Funds

5 min read

Sponsors of Capital Accumulation Plans (CAPs) are increasingly aware of the various ways in which private alternatives – including real estate, private credit and infrastructure - can enhance portfolio returns and retirement outcomes.

A recent article by TD Asset Management Inc. (TDAM) argues that incorporating private alternatives into Target Date Funds (TDFs) can lead to enhanced risk-adjusted returns for plan members.

Private alternatives offer lower correlation to public markets, stable income generation, inflation hedging properties, and a premium paid to investors for holding private market assets.

More and more TDF providers today are adding private alternatives to their solutions. But many rely on listed alternatives - e.g., Real Estate Investment Trusts (REITs) or infrastructure equities - and/or they have a relatively low allocation (less than 5%).
By contrast, the TD Greystone Target Date Plus Funds have a material 20-25% allocation to private alternatives. This is commensurate with the weight that defined benefit (DB) pension plans and large endowments have maintained for decades.

The paper explores the key components of TDAM's ability to deliver this DB-like solution to CAP clients of any size. These components include expertise in private and public markets, robust TDF design features and disciplined investment processes.

Private and Public Market Expertise
Critical to incorporating private alternatives in TDFs is a deep understanding of how they perform relative to public market assets. This includes the fundamental drivers of return for each asset class, as well as each asset's sensitivity and exposure to factors such as interest rates, economic growth, quality and credit. This analysis informs TDAM's portfolio construction process and helps prevent unintended risks or concentration of factors.

Robust TDF Design Features
The TD Greystone Target Date Plus Funds use in-house, open-ended private alternative strategies designed to be part of a multi-asset solution. All of these strategies emphasize core, high quality, income-producing assets whose relatively greater liquidity and stability align well with the needs of CAP members.

Disciplined Processes
Disciplined and well-defined processes for cash flow modelling, forecasting and communication are crucial for reducing the time lag between receiving a new cash flow and investing it in private alternatives. TDAM forecasts and models the four types of TDF program cash flows monthly. This information is included directly into alternatives portfolio modelling and helps better coordinate timing for sourcing and executing on accretive private alternative deals.
For more detail, read the full article.

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