Rob Arnott, chairman of Research Affiliates, is taking issue with criticism leveled by Folio Investing CEO Steven M.H. Wallman.
In a recent article, Wallman said Arnott's findings miss the whole point of a target-date retirement-type offering, which gives someone who saves throughout her working career the chance to reduce the riskiness of equity-based investments over time. "As you get toward the end of that working career, you don't have the opportunity to make up for riskiness in an equity-based investment," Wallman adds. "In order to preserve the wealth that's been accumulated, you need to reduce the risk level."
In a letter to Financial Advisor, Arnott says that the article "'Arnott Misses The Point' misses the point!"
"The numbers are what they are," Arnott wrote. "If someone can demonstrate that glidepath investing actually reduces a prospective retiree's risk by more than it reduces his or her prospective retirement income, that's a cogent rebuttal. Facts, not unsubstantiated assertions, are needed for a useful debate."
Arnott maintains history doesn't support the principle of glidepath investing, a strategy used for target-date funds in which a greater percentage of portfolio holdings are gradually shifted from equities to bonds the closer the retirement date is.
"Strategies that ended with a bond tilt reduced an investor's end-point wealth without reducing his end-point risk, despite a history that ended with arguably the biggest bond bull market in U.S. capital market history," says Arnott. "Even 10 years before retirement, a glidepath investor did not have materially less uncertainty about their retirement income than investors with a static mix or an inverse glidepath."
As part of its study, Research Affiliates compared traditional glidepath investing to an "inverse glidepath," in which equities were gradually increased from 20 percent to 80 percent over 40 years. The inverse strategy produced the best chance for the biggest retirement portfolio, the firm said.
A major problem is that baby boomer investors with retirement assets in traditional target-date funds are being transitioned from equity to bond portfolios when real bond yields are negative, Arnott said in his letter. "From that vantage point, more than from the historical perspective, it's possible that these strategies may today be inflicting genuine harm on their clientele; meanwhile, these strategies may be serving as enablers of bad behavior in Washington and other power centers in the developed world, by mechanistically supplying capital for deficit spending, without regard for the yield, or lack of same, on these investments," Arnott says. "Buying bonds that have no reasonable prospect for repayment (except via the issuance of more and larger debt), and that offer negative real returns for the investors, will not lead baby boomers to a comfortable retirement."
The article may have left the erroneous impression that a mechanistic glidepath solution be replaced with a mechanistic inverse glidepath, he says. "Nor do I advocate replacing a cult of bonds with a cult of equities. Rather, I think that investors should consider yield and valuation levels in making their investment decisions. In that regard, I strongly agree with Wallman. With a less mechanistic view of asset allocation, we can do much better for our clientele," he said.
To read Arnott's "The Glidepath Illusion," click here.