S&P Dow Jones Indices (S&P DJI) has launched the S&P Shift To Retirement Income and Decumulation (Stride) Index series in response to "the need for income focused benchmarks within defined contribution plans". The S&P Stride Index series are a multi-asset class solution designed to transition from growth assets to a hedged stream of inflation-adjusted retirement income based on target retirement dates. Dimensional Fund Advisors joined efforts with S&P DJI to develop the glide path, inflation hedging, and duration hedging techniques used in these indices.
The index provider is hoping to create a new category in the US by developing this concept, according to Philip Murphy (pictured), vice president of North American equity indices. "Target date funds are quite popular as an investment alternative within defined contribution plans, and this complements other target date indices in our range including the DJ Target Date index and the S&P Target Date index," said Murphy. "The new index combines the target date glide path with a risk management strategy on the uncertainty around retirement income so it's a combination of a conventional target-based strategy with a new risk management framework."
According to Murphy, the fully investable index has the scope to be used around different vehicles and investors. "In the US, the obvious space is the asset management market and those competing in the 401K segment but beyond that market and because of the structure of the index we believe it will fit in an income generating strategy that applies hedging to the interest rates and inflation risks (because it's investing in US Treasury Inflation-Protected Securities - Tips)," said Murphy. "What we're doing with this index is mitigating point in time interest risk and that is a very interesting way to transition from a wealth accumulation to income generation, and would be suitable for those who want to annuitise their investments without having to face the interest rates risk all at once."
The index can also be wrapped in a structured note issued by banks that want to offer their clients this strategy with additional features such as capital protection, said Murphy. "We believe the index will have a wide appeal in terms of vehicles, and hope this will also help to develop new income retirement solutions," said Murphy.
Each S&P Stride index consists of an allocation to a group of indices covering global equity, global fixed income and US Tips. Allocations are determined by five-year increments of target date years to cover a full life cycle of accumulation, defined as working years, and decumulation, defined as retirement years. To address any liquidity issues around new indices S&P DJI has developed the index with "a mindful approach to this issue so we have structured the index as index of indices and all the components of the index are major markets", according to Murphy.
"If the strategy were to become popular, it is possible that there could eventually be some capacity constraints around the Tips market but since the issuer is the US government we believe that if there is demand this will be met by new issuance, and we think this is a great use for those instruments and would help the market to mature," said Murphy. "The liquidity of the other sectors segment such as corporate bonds and international sovereign bonds have been the subject of debate for some time and that may be an area were liquidity is not as complete as in the equity side, and in the fixed income side there are liquid strategies such as ETFs. All in all, the index is comprised of indices made of liquid components."
The S&P Stride indices incorporates both pre-retirement asset growth and post-retirement income needs, "a unique combination unseen in traditional retirement benchmark strategies," said Murphy.
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