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TDF Underlying: U.S. vs International Exposure

In our Class on Asset Classes post, we laid the framework for the varying exposures that Target Date Funds (TDFS) can hold as underlying investments. Using that as a basis, we can compare the various TDF series and how they differ on various metrics. In this post, we’ll start by looking at how TDFs allocate to U.S. vs. International (Non-U.S.) exposure.

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By Clayton Fresk on March 11, 2020



In our Class on Asset Classes  post, we laid the framework for the varying exposures that Target Date Funds (TDFS) can hold as underlying investments.  Using that as a basis, we can compare the various TDF series and how they differ on various metrics.  In this post, we’ll start by looking at how TDFs allocate to U.S. vs. International (Non-U.S.) exposure.

 

As we noted, there are a couple different types of high-level classifications for equity exposure when looking at U.S. vs. INTL. exposure.  The simplest level is whether the fund is classified as holding U.S. exposure or International exposure.  But from here there can be a couple complicating factors.  The most common of which is the fund being classified as a World fund, meaning the U.S. and INTL exposure is commingled within one fund.  Another factor can be funds being classified as U.S. (or International), but active management mandates could allow for usage of international (or U.S.) exposure up to a certain threshold (but under an amount which would cause the funds to be reclassified).  Lastly, some funds classified as Sector funds could have split U.S./INTL exposure (the most common case we see in this situation is US vs Global Real Estate funds).

 

In the following analysis, rather than using the classification level to determine U.S. vs INTL exposure, we looked through to the underlying fund’s exposure to find the U.S. vs INTL split.  For the complicating factors discussed above, this is most pertinent to World funds, as these are commonly utilized within the TDF industry.  Looking through to the underlying exposure gave a clearer picture as to the splits.

 

This first chart isolates the equity exposure within a TDFs glide path and determines the split between U.S. and INTL exposure using the look through method described above.


Chart Source: Stadion

 

From this chart, we can glean a few different bits of information:

  • On average, the TDF industry has a 65% US / 35% International allocation split. This represents about a 10% home country bias, as the MSCI ACWI IMI (i.e. MSCI All Country World Index Investable Market) Index—which represents a holistic equity index—has about a 55% US / 45% International allocation
  • There is a wide divergence is the amount of U.S. vs International exposure being used, with the averages ranging from 97% US exposure on the high end to 42% on the low end. With that, there is a relatively normal distribution of said exposure around that ~65% average.  Here is a histogram of the average exposure

 


Chart Source: Stadion

  • There is a slight skew higher in the U.S. vs INTL exposure in shorter dated vintages as evidenced by the slight upward trajectory in the S&P Target Date index and Average lines.

 

This brings us to another point regarding U.S. vs INTL allocation.  Within the equity allocation, issuers can choose to keep a static/linear allocation to U.S./INTL exposure (meaning the split is the same for every vintage), or they can choose to skew the exposure.  Most commonly, if an issuer skews the exposure, they choose to allocate more to U.S. exposure in the shorter dated vintages, although this is not always the case.

 

One way to illustrate any skew is to measure the standard deviation of the US exposure across the glide path.  A smaller deviation indicates a more linear/static approach to the U.S./INTL split, whereas a higher deviation indicates more skew (one way or the other).

 

Here is the chart, with the Average and S&P notated in black/orange.


Chart Source: Stadion

 

The S&P and the Average lie in the 1-2% deviation range.  There are many series that have even more linear/static allocations across vintages (farther left on the horizontal), but also some who have slightly or distinctly more deviation.

 

So, what does this all mean for someone trying to select a single target date fund to use in a plan?  Any of the above information/data does not make a TDF better or worse.  It comes down to a matter of preference and education.  Some users may like the fact their TDF has a home country bias, whereas some may not.  Additionally, what if a situation arises where the overall glide path is deemed favorable, but the U.S./INTL split within that TDF is not favored.  Or conversely, what if a preferred US/INTL split is determined, but there is not a TDF that follow that exact split or skews from it along the glide path.  This U.S./INTL is also a contributing factor when looking at performance.  As relative performance between the U.S. and INTL markets can ebb and flow, this can be a contributing factor to TDF relative performance.

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Author: Clayton Fresk

Clayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.

Asset AllocationTarget Date FundsTDFs
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Written By:

Clayton Fresk

Clayton Fresk joined Stadion Money Management in 2009 and currently serves as Portfolio Manager of Stadion’s Retirement investment strategies, which comprises oversight of Stadion’s managed account, target-date, and risk-based strategies. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Clayton holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Minnesota. He also received an MBA degree and a Bachelor's degree in Finance & Marketing from the University of Minnesota.


There is no guarantee of the future performance of any Stadion account. Material has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Results based on available universe of Target Date Fund Series, which includes registered mutual funds, and non-registered collective investment funds and insurance accounts. Collective investment funds and insurance accounts are only available for investment to qualified retirement plan assets such as 401(k) plans. The commentary, analysis and opinions expressed are those of Stadion’s investment Team. The commentary, analysis and opinions referenced are as of the date of publication and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice.

 

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