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Quarterly Highlights - EDHEC-Princeton Retirement Goal-Based Investing Index Series

Date 21/01/2019

EDHEC has released the January 2019 quarterly highlights for the EDHEC-Princeton Retirement Goal-Based Investing Index Series.

Among the highlights:

Goal Price Index Series

  • As usual, monthly changes in Goal Price Indices are mainly driven by changes in US long-term interest rates. The first 10 months of 2018 featured an increase in long-term rates, with the 10-year rate growing from about 2.4% right after New Year's Eve to more than 3% in October. In contrast, the last quarter saw a decrease that took the 10-year rate back to 2.7% at the turn of the year. As a result, all Goal Price Indices start the year at higher levels than where they were in early December;
  • Taking the example of an individual who plans to retire in 2038 and targets fixed replacement income for twenty years starting in 2038, it cost $7.98 in December 2018 to acquire $1 per year of income. As of January 2019, the price of the same stream of replacement income has risen to $8.46.

Goal-Based Investing Index Series

  • Over the first three quarters of 2018, the general move was a rise in long-term interest rates that caused negative returns for GHPs in many months. On the other hand, the PSP followed a roughly rising trend. According to the weighting rule described in the Ground Rules of the Index Series, the percentage allocation to the PSP in an index is increasing in the relative return of the PSP with respect to the GHP, so this allocation tended to increase until the autumn of 2018. Indices with the longest retirement horizons (2038, 2043, 2048, 2053 and 2058) even became fully invested in the PSP;
  • Any change in the value of a Goal-Based Investing Index is the result of changes in the values of its constituents (the GHP and the PSP) and the relative weighting of these constituents in the index. With high PSP allocations, indices with long horizons were severely exposed to the US equity market downturn in December: the three major US stock indices (NASDAQ, Dow Jones and S&P 500) experienced substantial losses. In particular, the PSP lost 10.04%, so all indices that were entirely invested in this constituent at the beginning of December displayed the same negative return. Indices with retirement dates in 2023, 2028 or 2033 posted less negative returns in December, but still less than -4%;
  • The rebalancing rules of the index series stipulate that in every January, each Goal-Based Investing index is rebalanced back to the weights of a deterministic target date fund with the same target date as the index. This rebalancing operation takes place irrespective of market conditions, so January is the only month in the year where the relative weighting of the two constituents does not reflect their respective past performances and is driven solely by the retirement date. For all indices, rebalancing has led to a lower PSP allocation than at the beginning of December 2019. Just as in a standard target date fund, indices with longer horizons are more exposed to the risk of equities falling once more as well as to the chance of equities going back to higher prices.

The EDHEC-Princeton Goal-Based Investing Index Series is a joint initiative of EDHEC-Risk Institute and the Operations Research and Financial Engineering (ORFE) Department of Princeton University which aims to promote the use of state-of-the-art goal-based investing principles in retirement investing. At the start of this initiative is the recognition that none of the existing "retirement products" provides a completely satisfying answer to the threefold need for security, flexibility and upside potential.