Browne: Participants closest to retirement typically have the highest plan balances and the shortest investment horizons. A severe market downturn can have a devastating impact in terms of the planned participant balances as they age towards retirement.
Think back to 2008. Even well-diversified portfolios like target date funds suffered 30, 40, even 50% drawdowns during the financial crisis.
This can be devastating for the 65-year-old that spent their entire life saving for retirement and is really relying on that income in order to provide a smooth glide into retirement.
We designed RealPath Blend's systematic downside risk program to seek to protect against losses in the three vintages closest to retirement. Remember, this is when plan participants' balances are highest and their investment horizon is shortest.
During periods of normal market volatility the downside risk mitigation program will slightly detract from returns.
However, during periods of market stress we expect that the downside risk mitigation program will dampen volatility as well as enhance returns. In doing so we're able, over the lifecycle of the program, to help create a smoother ride into retirement, particularly during periods of market volatility.
PIMCO just concluded its Secular Forum, and one of the outcomes is that we think that the next five years are going to look vastly different than they have over the last decade. We've been in an environment where asset prices have continued to rise and volatility has remained exceptionally low.
And we think that we're now entering into an environment, particularly as we move later stage in terms of the economic outlook, that we are going to be in an environment where volatility is going to rise.
In addition to that, with geopolitical tensions rising and continuing to flare across the globe, that also will put upside pressure on volatility, and ultimately put downward pressure on asset class returns.
As a result of that we do think that the investment climate over the next five years is going to be one in which risk mitigation programs like PIMCO's RealPath Blend is going to be incredibly important into retirement.
All investments contain risk and may lose value. There is no guarantee that an investment in any strategy or portfolio will achieve the investment objectives or that the desired results will be realized. The performance of the RealPath Blend strategies will be affected by the underlying securities in which the strategy invests. These risks include, but are not limited to bond market risk, interest rate risk, issuer risk, credit risk, inflation risk, and liquidity risk. The cost of investing in the RealPath Blend strategy will generally be higher than the cost of investing in a portfolio that invests directly in individual stocks and bonds.
The RealPath Blend strategy was designed to provide investors with a comprehensive retirement solution tailored to the time when they expect to retire and plan to start withdrawing money (the "target date"). Each portfolio follows a target asset allocation schedule that changes over time to help reduce portfolio risk, increasing its exposure to conservative investments as the target date approaches. The principal value of the portfolio or investment is not guaranteed at any time, including the target date.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice. Investors should consult their investment professional prior to making an investment decision.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2019, PIMCO.