Market Overview

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


Good morning,

We are pleased to enclose the July 2018 quarterly highlights for the EDHEC-Princeton Retirement Goal-Based Investing Index Series:

Goal Price Index Series

  • The 2038 Goal Price Index for an income goal with no cost-of-living-adjustment is 8.57: this means that as of July 2, 2018, it costs 8.57 US dollars to secure 1.00 US dollar of replacement income every year starting in January 2038 for a period of 20 years;
  • Since January 2018, index values have remained rather stable. US interest rates have slightly increased: the yield on 10-year Treasury securities was at 2.46% on January 2 and is now at 2.84% after a peak at 3.11% in May. Higher rates imply in principle lower index values (just like they imply lower bond prices), but the horizon effect, which implies higher index values as time goes by, has offset this effect.

Goal-Based Investing Index Series

  • Since January 2018, the PSP (the equity portfolio) has outperformed all GHPs (replicating the Goal Price Indices). As a result, and in line with the rule-based allocation policy, all indices have a substantial allocation to the PSP, but the effect is more pronounced for long horizons, because equity allocation tends to increase with the horizon, like in standard target date funds: the 2023 indices for an income goal have 53.2% in PSP, the 2038 ones have 86.0% and the 2058 ones are 100% invested in PSP. These numbers will not decrease significantly until market conditions change and feature rising bond prices rising and falling equity prices;
  • In June, however, the PSP posted a slightly negative return of - 0.15%, while GHPs had small positive returns (e.g., 0.93% for the 2038 index for an income goal). As a result, indices had either small positive or negative returns (e.g., - 0.15% for the 2058 index for an income goal, and 0.21% for the 2023 index). Negative returns were posted by those with the heaviest PSP allocation, i.e. by those with the longest horizons;
  • Probabilities of reaching aspirational goals are very close for the index and for the deterministic target date fund, meaning that these strategies are close in terms of upside potential. But the indices have much greater probabilities of respecting the annual loss objective, especially over long horizons: the 2058 target date fund has only 19% chances of respecting this goal when the goal is expressed in terms of replacement income.

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.

Yours faithfully,

The EDHEC-Risk team.
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