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.
“This may not yet be a heavily tactical approach or a very actively managed approach, but there are elements of that in our strategy and we are looking to enhance it further,” Reichart says. “The advisor community seems to appreciate a more active approach toward the targeting of weights and rebalancing and we are in tune with that.”
Yet both Reichart and Mike Finnegan, Principal Funds’ chief investment officer and LifeTime portfolio manager at Principal Financial, believe that while active management is the way to go, it is also an approach that investors have a tendency to favor more in a down market.
“You saw many funds launch an active strategy in the late 1980s, but when markets are doing well, no one really talks about active management because everyone puts their money into equities and are less into rebalancing,” Finnegan says.
Participants in lifecycle funds and their advisors also need to realize that the true value of these vehicles and the kind of management approach they follow can only be validated in a full market cycle. Isolating performance based on this down period wouldn’t provide enough perspective, Reichart says, to make a true assessment of the merits of individual investment approaches.
Cunningham agrees: “It is imperative, in our opinion, that plan sponsors and advisors look at a full market cycle, the good times and the bad times, in order to narrow down the universe in terms of the alternatives that are available,” he says.
At the same time, it’s important for providers of lifecycle funds to be on the ball in terms of what kind of management style participants want, and lifecycle funds have to be able to live up to their name because they are, by design, supposed to be investment vehicles that people can just put their money into and forget about, Reichart says. While firms that are specialized in these products might be more attractive to investors and plan sponsors at this point in time, larger firms like Principal have both the strength and scale of being a global asset manager, he says, and can leverage their internal expertise to continually hone their products to suit a changing marketplace.
[Ed. Note: This story was corrected on March 5, 2009 and had originally identified Manning & Napier as having $19 billion in AUM and its lifecycle funds as only down 4%.]