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February 26, 2009 at 07:00 PM
Like their peers, the lifecycle funds of Manning & Napier, a $16 billion asset management firm based in Rochester, New York, did not manage to escape the market downturn. But Patrick Cunningham, managing director at Manning & Napier, is quick to point out that the funds are down just under 5% (compared to 20% and more for other, similar products), and he credits this to Manning & Napier’s hands-on, almost day-to-day active management style, which Cunningham believes ought to be replicated across the entire lifecycle industry in order to make these funds more effective.
“We view managing risk as getting out of highly valued sectors of the market and getting into undervalued sectors in an active manner,” Cunningham says. “Most other lifecycle funds only rebalance when there are quarterly needs, but as a firm, we have always been active managers and we do active asset allocation.”
Cunningham believes that investors in lifecycle funds, especially after what’s happened to financial markets, really want active risk management. Most of the lifecycle funds that have come into existence in the past years are managed on a fund-of-funds basis that at the end of the day, whether explicitly or implicitly, results in “passive asset selection and index-like performance.”
“The more index-like you are, the more passive you were in your asset selection, the less benefit you add,” he says. “The kind of security selection that allows a manager to meaningfully move through market sectors from high value to low value, and gives them the ability to also move out of stocks if necessary, has historically provided downside protection to participants.”
Since its inception in 1970, Manning & Napier has stuck to this approach for all the funds it manages. The firm was a pioneer in the lifecycle industry and has carved a niche for itself in the asset class–something that Cunningham believes bodes well at a time when investors are both questioning the nuts and bolts of their retirement savings vehicles and demanding more from them. Specialist firms, he says, can provide the kind of more actively managed approach that investors want in a lifecycle product. Indeed, some specialized firms are even starting to provide customized glidepaths that look at the demographics of a retirement plan, taking into account the amount of risk management that a sponsor wants and creating a lifecycle vehicle based exclusively on this.
“I believe there is a greater concern for risk management now and I think we are going to see a growth in this kind of approach,” Cunningham says.
Larger firms for which lifecycle funds are but a part of the overall business also agree that a more active approach to managing these vehicles is necessary. David Reichart, senior VP, Principal Funds, for Des Moines, Iowa-based Principal Financial Group, says that his firm is at the forefront of introducing investment alternatives such as high-yield bonds, real estate, and Treasury Inflation Protected Securities (TIPS), and is always looking at the relative value of these and more traditional asset classes as a barometer for rebalancing its lifecycle products.
