beyond target date funds

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A&P Capital LLC

July 16, 2013

Beyond Target Date Funds:Performance Responsive Dynamic Strategies

All rights reserved by A&P Capital LLC. All information presented in this document should be considered

as Confidential information and shouldnt be shared or copied in any process or medium without theexpressed written permission of A&P Strategies.


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People close to retirement dont have time for a do-over.Even for those still far from retirement, theres no tellinghow stocks will perform in the future.

- NYT EDITORIAL, From Here to Retirement. January 25, 2009

The Crux of the

Retirement Investing Issue

Retirement savings devastated.

Retirement savings devastated.

S&P returns


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The Retirement Investment Challenge

Very long investment horizons.

Very diverse investor circumstances.

Unpredictable inflation/market returns. Unreasonable investor expectations:

Minimum return assurance.

High equity returns. High-water-mark memory (potential regret).


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The Ideal Retirement Solution

A Solution that

Protects:Provides floor in poor markets.

Captures: Gains in value during good markets.

Locks: Providespartialhigh-water-mark lock influctuating markets LimitedRegret.

Has No artificial maturity or target date.

Is Understandable and implementable.


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The Incumbent:

Target Date Funds


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Target Date Funds: A Quick Test

Assume a 10 year Target Date Fund with Equityexposure glide path of 100%, 90%, 80%,,10%.

Now consider two future market returnsequences of equal total return, volatility andlikelihood:

2%, 4%, 6%, 8%, , 20% return in years 1, 2, , 10.

20%, 18%, 16%, , 2% return in years 1, 2, , 10.


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Target Date Funds: Locks in Losses


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Target Date Funds: Simulation

Executed 100,000 simulations to simulate possibleTarget Date Fund returns over a 35 year period with thefollowing constants:

Volatility: 18%, Average S&P Return: 7%, Average Bond Yield: 4%

Simulated the following cases:

A normal glide path Target Date Fund.

A reverse glide path Target Date Fund (reverseallocation of stocks and bonds).

A constant mix Fund (a constant allocation of 50%equity and 50% bonds).


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Histogram of Glide Path (GP) Final

Portfolio Values

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Histogram ofReverseGlide Path (RGP)

Final Portfolio Values

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GP distribution = RGP distribution!

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GP vs. RGP vs. Constant 50% bond 50%

stock portfolio


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Incumbent Target Date Funds : Concerns

A Target Date fund with the incumbent forward glide path willprovide the same distribution of returns as a reverse glidepath!!

The distribution of investor returns at the target date are nodifferent than that from an equivalent constant stock/bondmix, except the constant mix has a slightly lower dispersion.

Over any specific future period, Target Date Fund returns arevery dependent on the sequence of annual returns, aconstant mix is not.

There is little certainty of final wealth (retirement security).


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Target Date Funds Why is it so popular?

Conveys idea of protection.

But it can minimize exposure against highmarket returns in the later years.

Convey idea of locking-in gains

But it can lock-in low returns in the earlyyears.

No better alternative is promoted.


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A Better Alternative

The Appreciation and Preservation(A&P) Strategy


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A&P Strategy: Features

Protects:Ensures a minimum portfolio value inpoor markets.

Captures: Gains in value during good markets. Locks: Providespartialhigh-water-mark lock in

fluctuating markets LimitedRegret

Operates in 3 year sub-periods.


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1) The strategy sub-period is chosen, e.g., 3 years. Thissub-period will roll forward at a point determined by theportfolio performance.

2) The portfolio is constructed with an equity call optionand discount bond, or alternatively as an equity plus aput option. This establishes a portfolio underlying assetand floor value for each sub-period.

3) A target value is set above the initial value of theportfolio the gain-lock level. This establishes thegain-lock level for each sub-period.

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A&P Strategy: Details


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4) If the gain-lock is hit, the gain is captured and thestrategy is rolled forward.

5) Otherwise the strategy is rolled at the sub-periodmaturity.

6) The roll process continues through time. There isno arbitrary termination.

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A&P Strategy: Details


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A&P Strategy: Simulation from 1970 to 2010

A&PStrategyreturns.

S&P Indexreturns.

Additional Simulation Assumptions:Starting date 1/2/1970 and retiring in 12/30/2012. Initialinvestment = $1000, recurring annual investment =$1000 increasing at a rate of 5% every year.


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A&P Strategy: Simulation from 1970 to 2010: ZOOMEDbetween 2008 to 2009: The A&P advantage is clear to a person

retiring during this time.

A&PStrategyreturns.

S&P Indexreturns.

Additional Simulation Assumptions:Starting date 1/2/1970 and retiring in 12/30/2012. Initialinvestment = $1000, recurring annual investment =$1000 increasing at a rate of 5% every year.


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Sounds good in theory, but can a

A&P Strategy be implemented, on a

large scale, in practice?

-Absolutely YES


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The actual Merrill Lynch $250 million Fund

Merrill Lynch closed the fund in 1997/1998 as the stock market was experiencing the historic bull run. Since then 2

major crashes have happened wiping out the retirement savings of many Americans. Had ML continued, theirinvestors would have seen the potential benefits today. A&P Strategies provides the same solution today.


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Summary

Target Date Funds have severe path-dependencyand regretpotential. Risky for retirement confidence.

A&P strategies offer a mix of gain potential, capitalpreservation and limited regret that many retirementinvestors would find more desirable than the TargetDate alternatives, or as supplements.


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All rights reserved by A&P Capital LLC. All information presented in this document

should be considered as Confidential information and shouldnt be shared or copied inany process or medium without the expressed written permission of A&P Strategies.

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