QIC’s bid to build a better lifecycle fund

The Queensland Investment Corporation has poached senior executives from QSuper and JANA Investment Advisors under a bold plan to enter the ‘lifecycle fund’ market. Michael Drew, the former Griffith University finance professor and just-resigned member of QSuper’s investment committee, and Evan Reedman, a fellow Queenslander and academic collaborator who was head of portfolio construction research at asset consultant JANA, will attempt to design a ‘lifecycle fund’ superior to the ‘target date’ and ‘target risk’ products seen to date, with the hope that major super funds may want to tailor it for a member investment choice option.

It is the first major initiative for the ‘house of boutiques’ since Hazel McNeilage started as head of funds management in January, and the new pair will be assisted by QIC’s Strategy boutique under Adriaan Ryder, and Capital Markets boutique under Troy Rieck. McNeilage said QIC’s work on lifecycle funds had been going on for at least three years, but would synthesise and learn from recent experiences in the US where ‘target date’ funds have become the default option in most employer-sponsored ‘401(k)’ schemes. She admitted they had not been without controversy, particularly regards whether the funds should work “to” or “through” their target date – that is, the date upon which the investor retires and stops contributing to the funds.

The “to” funds have an asset allocation ‘glide path’ which is supposed to see them almost free of growth assets in the year before their target date, while “through” funds attempt to deal with post-retirement longevity risk by extending the glide path out another 20 years or more, maintaining higher growth exposures for longer. The ‘target risk’ funds identified by McNeilage are mostly used by Amercian financial planners working with individual clients to keep a constant, pre-agreed level of investment risk within a portfolio. There was an outcry in the US when many of the “through” target date funds with a 2009 or 2010 target date lost 40 per cent or more during the global financial crisis.

Drew has been at the frontline of the US debate, being the only academic invited to present at a joint hearing held by the Securities Exchange Commission and US Department of Labor last June, examining why many investors misunderstood the competing approaches to the target date. He presented the findings of work done with Anup Baus of the Queensland University of Technology (also Evan Reedman’s alma mater) which found that ‘autopilot’ investing, where asset allocation decisions are made simply on the basis of age, “may provide only limited downside protection for investors, while materially capping the upside”.