La Française AM "Dynamic Allocation Models and New Forms of Target-Date Funds for Private and Institutional Clients" Research Chair
The La Française AM "Dynamic Allocation Models and New Forms of Target-Date Funds for Private and Institutional Clients" Research Chair (formerly UFG-LFP), under the leadership of Lionel Martellini, the scientific director of EDHEC-Risk Institute, will examine the limitations of target-date funds of gradually more conservative profiles and the advantages of an asset-liability management approach sensitive to the period and to the economic cycle for target-date funds, in particular for pensions.
The chair will be overseen by a joint La Française AM/EDHEC-Risk Institute steering committee.
The first project undertaken as part of the chair is an analysis of target-date funds for pensions, the results of which were presented at EDHEC-Risk Institutional Days in Paris on 26 and 27 May 2009.
[Press release announcing the launch of the research chair: 05/05/09]
Research output
Life-Cycle Investing in Private Wealth Management
October 2011
Romain Deguest, Lionel Martellini, Vincent Milhau
This paper argues that financial innovation is needed to design better target date funds based on stochastic life cycle investing, taking into account the presence of risk factors that impact not only asset returns, but also private investors’ wealth levels. One key element in private wealth management is the presence of income risk, which has a substantial impact on the optimal asset allocation strategy.
From Deterministic to Stochastic Life-Cycle Investing: Implications for the Design of Improved Forms of Target Date Funds
September 2010
Lionel Martellini, Vincent Milhau
In this paper, we characterise in closed-form the optimal time- and state-dependent allocation strategy for a long-term investor preparing for retirement in the presence of interest-rate and inflation risks and a mean-reverting equity risk premium. We confirm that existing target date fund products are the wrong answer to the right question, and the opportunity cost involved in purely deterministic life-cycle strategies is found to be substantial for reasonable parameter values. Surprisingly, perhaps we also find that even reasonably
fine partitions of the set of investors and market conditions, only marginally more complex than current partitions based solely on time horizon, allow substantial welfare gains compared to existing target date funds. Our results have important practical implications since they suggest that a parsimonious set of life-cycle investment benchmarks can be designed, which could serve as relatively accurate proxies for a whole range of retail investors’ optimal long-term investment strategies.
Related research:
New Frontiers in Benchmarking and Liability-Driven Investing
September 2010
Noël Amenc, Lionel Martellini, Felix Goltz, Vincent Milhau
This paper argues that novel forms of investment solutions should rely on the use of improved performance-seeking and liability-hedging building-block portfolios, as well as on the use of improved dynamic allocation strategies.
Related articles
Improving life cycle funds
Financial Times
28/09/2009
Lionel Martellini, Vincent Milhau
"(...) Financial innovation is needed to design better target date funds that take markets into account. There is ample room for added value between one-(allocation)-size-fits-all (investors with same age) solutions and do-it-yourself approaches to long-term investment decisions. (...)"
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