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DYNAMIC ASSET ALLOCATION FOR TARGET DATE FUNDS UNDER THE BENCHMARK APPROACH

Published online by Cambridge University Press:  29 March 2021

Jin Sun ,
Dan Zhu  and
Eckhard Platen
Jin Sun*
Affiliation:
Department of Econometrics and Business Statistics, Monash University, E757 Menzies Building, Building 11, East Wing, Wellington Rd Clayton, VIC, Australia, E-Mail: [email protected]
Dan Zhu
Affiliation:
Department of Econometrics and Business Statistics, Monash University, E757 Menzies Building, Building 11, East Wing, Wellington Rd Clayton, VIC, Australia, E-Mail: [email protected]
Eckhard Platen
Affiliation:
Faculty of Sciences, UTS Business School, University of Technology Sydney, Ultimo, NSW, Australia, E-Mail: [email protected]
*
E-Mail: [email protected]
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Abstract

Target date funds (TDFs) are becoming increasingly popular investment choices among investors with long-term prospects. Examples include members of superannuation funds seeking to save for retirement at a given age. TDFs provide efficient risk exposures to a diversified range of asset classes that dynamically match the risk profile of the investment payoff as the investors age. This is often achieved by making increasingly conservative asset allocations over time as the retirement date approaches. Such dynamically evolving allocation strategies for TDFs are often referred to as glide paths. We propose a systematic approach to the design of optimal TDF glide paths implied by retirement dates and risk preferences and construct the corresponding dynamic asset allocation strategy that delivers the optimal payoffs at minimal costs. The TDF strategies we propose are dynamic portfolios consisting of units of the growth-optimal portfolio (GP) and the risk-free asset. Here, the GP is often approximated by a well-diversified index of multiple risky assets. We backtest the TDF strategies with the historical returns of the S&P500 total return index serving as the GP approximation.

Keywords

Target date fundsoptimal glide pathdynamic asset allocationbenchmark approachG22G23C22
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 51 , Issue 2 , May 2021 , pp. 449 - 474
Copyright
© 2021 by Astin Bulletin. All rights reserved

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