AB Adds Volatility Management to Target-Date Offerings

According to an announcement, in early April 2010 the firm will add a new Volatility Management component to its Retirement Strategies target-date mutual funds. The Volatility Management component is designed to “reduce the market risk of the funds during periods of extreme volatility”, according to the firm.      

According to Seth J. Masters, Chief Investment Officer of Blend Strategies and Defined Contribution at AllianceBernstein, “This important enhancement is the result of a multiyear firmwide research effort, which created new tools we believe can be applied to ‘smooth the ride’ and improve retirement outcomes for defined contribution plan participants. The project demonstrates our ongoing work to deliver our best thinking on target-date design to plan sponsors and investors.”

Controlling Risk  

AllianceBernstein’s Volatility Management approach seeks to balance risk and return, placing primary emphasis on controlling risk.  According to the announcement, this differs from traditional tactical asset allocation which “focuses primarily on predicting asset-class returns and attempting to time the market to take advantage of short-term opportunities to enhance returns”.

The firm will allocate up to 20% of the existing Retirement Strategies target-date funds into the new Volatility Management component, with the allocation varying by vintage. This Volatility Management component will invest in a mix of equities and REITs in normal markets but will have the ability to dynamically de-risk into bonds and cash when it’s appropriate to reduce overall portfolio risk.  The Volatility Management component will replace a portion of the equities and REITs so the long-term strategic allocation does not change following the introduction of this component into the Retirement Strategies funds, according to AllianceBernstein.

“Target-date funds naturally reduce the volatility in a portfolio by reducing the exposure to equities over time as an investor approaches and moves through retirement. With Volatility Management, we can now more explicitly manage risk in target-date portfolios,” Thomas J. Fontaine, Head of Defined Contribution at AllianceBernstein, said in a press release.  “We believe our new risk management tools will allow us to adjust portfolios during extreme market cycles such as the recent credit crunch, moderating short-term negative performance—but importantly, without sacrificing long-term return potential.”

An institutional implementation of Volatility Management will be available in the second quarter of 2010 for use in customized target-date portfolios, including AllianceBernstein’s Customized Retirement Strategies service for large market defined contribution plans.

AllianceBernstein Defined Contribution Investments (ABDC) is a business unit of AllianceBernstein that offers a range of solutions to meet the needs of defined contribution plan sponsors and participants.  More information on ABDC is available at http://www.abdc.com.