“A Smarter Way To Invest”

Exploring Stocks and Bond Strategies with Mike Dever on Money Matters TV

Exploring Stocks and Bond Strategies with Mike Dever on Money Matters TV

In a recent episode of Money Matters TV, host Mike Dever, founder and CEO of Brandywine Asset Management, teamed up with co-host Jeff Watkinson to provide viewers with their views on the opportunities in today’s stock and municipal bond markets. The Stability of Major...

Innovating Investment: Brandywine’s Risk Replacement Strategy

Innovating Investment: Brandywine’s Risk Replacement Strategy

Introducing Enhanced and Target Date Funds This article spotlights Mike Dever and Brandywine Asset Management’s distinctive approach to seeking high returns with reduced risk through their innovation of "Risk Replacement." Dever, the firm’s founder, has crafted a...

In The News
30 Jan, 2025

Rethinking Target-Date Funds: Brandywine’s Innovative Approach

CNBC recently posted an article titled “Are target-date funds, the most popular 401(k) investment, right for you?”.

Despite the shortcomings highlighted in this article, I fully agree with Christine Benz’s statement that “target-date funds have been nothing short of the biggest development for investors since the index fund.” That said, her statement is more indicative of how bad the situation was, than how great it currently is.

Here’s why.

The Issue With Target-Date Funds

The primary issue with target-date funds isn’t the “one size fits all” approach mentioned in the article, but rather their flawed method for managing risk. These funds operate under the assumption that not only are bonds inherently less risky than stocks, but that they will add value when stocks fall in price. This leads those funds to enact a gradual shift from equities to bonds as retirement approaches. This philosophy is fundamentally flawed, as was laid bare during the market downturn of 2022.

Target date funds failed to deliver on their promise because of two key reasons:

1. Bond Correlation: Bonds are historically uncorrelated with stocks – not negatively correlated. While they may rise or fall less sharply when equities decline, this is not assured. In 2022, bonds dropped significantly alongside stocks, exposing investors to steep losses.
2. Lower Returns: Even when bonds provide some diversification value during equity bear markets, they do so at a high cost. Allocating from stocks into bonds will almost certainly reduce returns during equity bull markets, eroding long-term growth potential.

The problem stems from how “risk” is defined. Risk should not be measured by the size of any particular loss, but as the probability that someone will fall short of maintaining their lifestyle in retirement. Viewed this way, reducing returns by allocating into bonds – just by itself – increases risk.

Redefining Risk with Brandywine’s Target-Date Funds

There is a smarter way to invest. Brandywine has developed a suite of target-date funds that maintain significant equity exposure while directly mitigating risk through an innovation called “Risk Replacement.” This approach provides direct loss protection through the purchase of put options. When stocks fall, the value of the put options rises. It’s just math. It does not rely on the hope that bonds will mitigate stock market losses. This protection enables the funds to maintain greater equity exposure for longer into retirement, which reduces sequence-of-return risk and increases the potential for more money in retirement.

Additionally, Brandywine’s funds incorporate a “Return Driver Diversifier” structured to offset the cost of the put options over time. This structure not only maintains bear market protection at all times, but also preserves the potential to match bull market performance.

Risk Replacement represents a transformative step forward – akin to the impact of passive index funds in the 1970s and target-date funds in the 1990s. With each innovation, investors have been able to increase their potential for more money in retirement and decrease their risk of falling short of their lifestyle needs.

Learn more about how Brandywine’s target-date strategies can transform your retirement planning.