Behind JPMorgan’s Underweight Equity Strategy in Target-Date Funds

As the Federal Reserve voted to leave interest rates unchanged at its most recent meeting November 1, keeping rates at their highest level in 23 years, asset managers are taking precautions when adjusting asset allocations in target-date funds, among other investments. 

With the Fed taking the “stimulus out of the economy” by keeping interest rates high, Dan Oldroyd, head of target-date strategies at J.P. Morgan Asset Management, says this creates an “awful lot of unknowns.” 

“For us, we want to be a little bit more cautious on the equity side,” Oldroyd says, adding that has been J.P. Morgan’s house policy for the past 18 months or so.  

Within target-date funds, Oldroyd says J.P. Morgan has a long-term goal of income replacement in retirement, and the firm is making projections over 40-year time horizons. J.P. Morgan uses long-term capital markets assumptions, updated on an annual basis, to determine asset allocations.  

But at the same time, the firm is looking at the possible “headwinds and tailwinds” within the next 12 months and will deviate from the glide path plus or minus 4% in order to protect against any fluctuations in the market.  

“We’ve been a little underweight [in equites], [and] we’ve used a little bit more cash in the portfolios,” Oldroyd says. “We want to be cautious around the glide path. If a long-term glide path has it ending at 40% equities, we’re probably sitting at 38 or 37.5% underweight. That’s going to reflect how we think things might play out for the next 12 months.” 

Oldroyd predicts the Fed will keep rates in the 5.25% to 5.50% range into 2024, which is why J.P. Morgan is maintaining underweight equity in its portfolios. 

According to data from Morningstar, as of September, J.P. Morgan’s SmartRetirement 2025 R5 target-date fund allocated 47.25% of assets to equities and 47.25% to bonds. Once the fund reaches its vintage year, 2025, Oldroyd says the glide path will adjust to be allocated to 40% equities and 60% fixed income in an attempt to balance and create more certainty for participants in these near-term retirement portfolios. 

“We’re balancing out the need to grow portfolios with the fact that, ultimately, you want to shift to a little bit more certainty or capital preservation in the portfolios,” Oldroyd says.  

When the typical participant gets to retirement, Oldroyd says that within three years, they have usually withdrawn all assets from their 401(k) plan—or have rolled the funds over to an IRA—and have begun the process of spending.  

“What we’re able to do and study is how long people stay in the plan, how long they stay invested and then what they’re spending it on,” Oldroyd says. “We have access [to this information] through our partnership with Chase, so I think we have a really interesting view into the level of spending that we need to support in portfolios.” 

In addition, in making its recent capital market assumptions, J.P. Morgan analyzed the emergence of artificial intelligence, technology, automation and energy transition. Oldroyd says some of the firm’s portfolio shifts made for the long term include reducing emerging markets equities, increasing EAFE—non-U.S. developed market equities—and increasing the U.S. large cap.  

“We’re seeing more opportunity in those two asset classes, as opposed to others,” Oldroyd says. 

He says J.P. Morgan also sees opportunity in real estate, such as in alternatives like property funds, as well as real estate investment trusts. REITs have a small presence in the equity bucket of the target-date funds, according Oldroyd.  

For participants nearing retirement, Oldroyd stresses the importance of contributing as much as possible into target-date funds . If a participant nearing retirement feels the need to play catch-up and is concerned about outliving their assets, Oldroyd says a lifetime of not contributing cannot be made up by trying to time the market and invest aggressively. 

“That’s a really difficult place to be in as a participant,” Oldroyd says. “There are things like catch-up contributions in the 401(k) defined contribution market, and by all means, take advantage of those, because you can put even more money in.