Growing your savings with BlackRock Target Date Funds

We introduce BlackRock, the world's largest investment manager and provider of the target date fund offerings available through the Advantages Retirement Plan™.

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Farzan Qureshi: What the research has shown is that individuals need three things to be good investors. They need knowledge, interest and time. When I think about myself, I may have the knowledge. I certainly have the interest. I love investments, and I love thinking about them even on my vacation, but do I have the time and the discipline?

Audio: Welcome to the Financial Checkup, a podcast series devoted to improving the financial health and retirement readiness of physicians and their spouses and common law partners. This series is brought to you by the award-winning Advantages Retirement Plan from OMA Insurance. This episode features audio from an Advantages Retirement Plan webinar recorded in March 2021.

Preya Singh-Cushnie: I'm Preya Singh-Cushnie, Director at OMA Insurance, plan sponsor for the Advantages Retirement Plan. I'll be your host and moderator for today's webinar. Last year, some of you, or many of you would've heard Vanguard announced to us, that they were closing their Canadian target date funds, which meant we had to find a new provider. The OMA Insurance team and our partners at Commonwealth immediately began the process of choosing a new target date fund provider for the plan. The objectives were clear, find a new provider with low-cost, diversified target date funds and ensure a very smooth transition to this new target date fund manager as soon as possible.

The process also required involvement from our Advantages Retirement Plan investment committee members. The members of this committee are investment experts, including three former executives from Canada's largest pension funds and two physician member representatives. The committee in OMA Insurance has a responsibility to put members' interests first when selecting target date fund options available through the Advantages Retirement Plan.

And with that, I'm very pleased to announce the BlackRock is our new target date fund provider. With me today is their Canadian representative, Farzan Qureshi, Senior Investment Strategist from BlackRock. Thank you for joining us today. In today's webinar, Farzan I will introduce BlackRock and talk about the history of BlackRock as a corporation and its capabilities. He'll also explain what target date funds are, how they work and learn more about BlackRock's LifePath target date funds. And before we begin the introduction, please note that the information provided in today's webinar is for educational purposes only. It's not intended to be taken as advice. And it does not take into consideration any individual's particular financial needs. And now with that, I'd like to pass it over to our special guest speaker, Farzan.

Farzan Qureshi: Hi there, everyone. Pleased to be here. My name's Farzan Qureshi. I work with BlackRock. I've been with BlackRock for just over 21 years, mostly here in the Toronto office and looking after our defined contribution business, what we're talking to you about today, working with clients, such as yourselves and institutions, such as yourselves, talking about our target date funds and managing those target date funds. So really happy and excited to be here.

Preya Singh-Cushnie: Excellent. And we're really excited to have you with us today. Thank you. And welcome. So Farzan, over to you. Our presentation's going to start off with asking you what you can tell us about BlackRock as a corporation.

Farzan Qureshi: Sure. Many of you might have heard of BlackRock or seen us in the news. We are the world's largest investment manager. We're just over 8 trillion dollars under investment management, mostly for clients such as yourselves, be they institutions or planned sponsors and planned participants. Majority of our assets, that 8.67 trillion dollars, are for pension assets, ultimately. In Canada, we manage about 200 billion in assets for Canadian clients, which makes us actually Canada's largest pension manager for defined contribution assets and second largest manager for pension assets in the defined benefit space. So we've been in Canada since 1992. We've got clients in every province and territory of this country. We've got about a hundred folks working in the Canadian offices, both in Toronto, Montreal and Vancouver.

So for all intents and purposes, we are the Canadian division of BlackRock, which is a large global asset manager. We're talking about the Canadian division of BlackRock here. But ultimately, BlackRock actually invented target date funds. So the funds that we're going to be talking to you about today have become the gold standard for corporate pension plan investors, such as yourselves and plan participants. Target date funds have become the gold standard of choice for investment platforms, such as defined contribution plans, such as yourselves. But BlackRock actually invented that category in 1993. And we've obviously learned a lot over that 25, 30-year history. We've seen the dot-com boom and bust. We've seen the great financial crisis. We've seen COVID. We've seen a lot of different market environments over that 25-year history.

And so we've got a lot of experience, we would say the most experience of anyone on the planet in terms of managing these types of portfolios for individual participants, such as yourselves on the webinar here. Taking a step back, when we think about individual investors, individual investors, such as myself, such as yourselves, I'm part of a defined contribution plan at BlackRock as well. Every paycheck I get some money that I get to put into my retirement account. And ultimately, how do I allocate that money in my retirement account? What the research has shown is that individuals need three things to be good investors. They need knowledge, interest and time. When I think about myself, I may have the knowledge. I certainly have the interest. I love investments, and I love thinking about them even on my vacation.

But do I have the time and the discipline to make sure that I'm appropriately allocated, I have the appropriate mix of stocks and bonds? Given my age, given my time horizon, am I rebalancing that and making that appropriate every single year, every single quarter, as things change in my life? Typically, there's too much inertia. There's a lot of information. And individual participants such as ourselves have difficulty going and making those knowledgeable decisions about our asset allocation. And typically, what this means is individual investors such as ourselves, typically underperform professional investors by about 2% a year. Over a 30, 40 year time horizon, that 2% a year of under performance versus a professional manager means that we are leaving hundreds and thousands of dollars on the table and we're not being invested appropriately.

So what BlackRock designed and what BlackRock invented was this concept of a target date fund. You as a participant, me as a participant, all we need to think about is, what day do we need this money later on? What day are we going to retire? What day are we going to buy that new house? Or whatever that item that you're really saving for, and here, we're talking about retirement, when am I going to retire? And then ultimately, invest in one fund, that BlackRock has designed for that target date, for that specific year 2045, 2050 and then that fund is automatically rebalanced. It's got a diversified mix of stocks, bonds and other assets. And over time becomes more conservative, so that at every stage in life a participant is appropriately allocated across stocks, growth, bonds, protection and other assets as appropriate for their age. It's an automatic solution.

It's a one-stop solution, where the plan participant yourself, myself, invest in that one fund and the fund automatically adjusts over time. Early on in the participant's career, an employee's career, if I was 22 years old, I have a really long time horizon. I've got 40+ years of working and then potentially, 30+ years of retirement. I have a lot of time on my side. We would invest all that participant's money in a proportion of a stock portfolio that is well diversified across Canadian, US, international developed markets, as well as emerging market stocks in a portfolio that leans into that growth profile so that young investors have a long time to take benefit of that growth. And they should be growing their assets over that time. As time progresses, and we get older, as we get into our 30, and 40s, and 50s, our time horizon has shrunk.

Obviously, we're working. We have less time to go to work. And ultimately, we want to protect some of our balance that we have now been building over the last number of years. And hence, the target date fund automatically starts including bonds into the portfolio. Fixed income act as that ballast, and that capital preservation, and the volatility dampener in the portfolio. So acting as a ballast as more of the capital preservation spot in the portfolio and keeping that portfolio well allocated for participants in their middle of their career. But as we approach retirement, again, we want to maintain growth in the portfolio, because retirement for participants, if we turn 65 in Canada, the average life expectancy is 84, which means many people will live above 84. Many people will live below. And ultimately, we need that portfolio to continue growing even in retirement.

So in retirement that portfolio now has about 40% of stocks and about 60% bonds or fixed income in retirement. And we hope that, we want participants to stay allocated in these funds so that they can have the appropriate asset mix based on their career stand and based on how much time horizon they have left, according to kind of the average laws of life expectancy in Canada. So that's kind of how it works in a nutshell, very quickly. There's actually a number of different funds that we actually manage. These target date funds, they're obviously, professionally managed by BlackRock. As I mentioned, we have been managing these types of funds since 1993. We have a team of about a hundred people that are focused exclusively on managing target date funds.

We have 25 researchers, folks that have PhDs and are research professionals thinking about what's coming next in terms of new assets that we should be thinking about, but also how life expectancy, how the human experience, is evolving over time and how we should be thinking about that in our portfolios. So a big professional team of folks with lots of experience managing these portfolios to ensure that we have the most up-to-date research in terms of what academics are thinking about this problem and how to solve it in terms of having the appropriate asset mix, but also making sure that we have the right instruments within the portfolio to deliver our objective. Ultimately, these are portfolios that are highly diversified. So they have, as I talked about, lots and lots of different assets in the portfolio.

What we're trying to deliver to participants is what a sophisticated defined benefit or big pension plan, like the CPP, or OMERS, or some big professional pension plan would have access to. They would have access to Canadian stocks, US stocks, international stocks. They would also have access to real estate, infrastructure, commodities, lots of different asset classes that we can get exposure to. So that is the objective. We want to deliver a professionally managed fund that has exposure to all kinds of asset classes that sophisticated investors would have. We know that it's adjusted over time, as we talked about. These are investments, if I can just use the words, long horizon, these are long horizon strategic portfolios for individuals to be able to have a really long time horizon. They just need to invest in that one fund.

They won't have to change it back and forth. We do that automatically. It's a long horizon investor that's getting adjusted over time. It's including the building blocks, the actual pieces that we've got underneath the hood are broad market index funds, Canadian equity index, all the stocks in the Canadian equity market in the Canadian stock market, US stocks, all the stocks in the S&P 500. What we're trying to deliver is lots of breadth, lots of high exposures, as much exposure as we can deliver across the world to different companies. So we're trying to do a long horizon. This is for long horizon investors with lots of high breadth, meaning lots of index exposures that give all sorts of exposure to different markets around the world. And importantly, it's low cost.

Because these are index funds under the hood, it means that they are going to be low cost, low turnover in terms of how to manage those funds. BlackRock has been managing index funds since the 1970s. So we know how to manage those index funds in a very cost effective way. When we put these portfolios together, they're strategic and long term for long term investors, such as participants who may be holding them for 40, 50, 60 years of their life. They're high breadth, meaning they have exposure to lots and lots of different assets, stocks, bonds across the world, and other assets like real estate, infrastructure and commodities, which are alternative assets. And importantly, they're low cost, meaning the cost is managed and index funds typically mean they're lower cost. And because we've been negotiating with OMA and Commonwealth, we've been able to deliver this type of solution in an institutional format to you through OMA and through Commonwealth.

These funds are not available on the retail world. If you go out in the retail mutual fund space, these funds are not available. And so they are available to institutional pension assets and pension clients, such as a defined contribution group RSP plan, such as yourselves or a different type of DC plan that's managed by a specific company. So these are institutional funds at a very low cost. We don't have a retail markup. We don't have sales people going out and selling them that we have to increase fees. We don't have to have a lot of disclosures, because they're not in the public space. So we don't have to file all these sorts of different regulatory documents, which all would increase the cost. These are institutional. They've been vetted by OMA. They've been vetted by Commonwealth. And that's where you're getting that institutional capability being delivered to you as a plan participant.

As we talked about earlier, as a participant, you just need to manage what year that you're going to be needing that money, when you're going to be retiring. I, for example, at BlackRock, we use the same type of funds in our group RSP. I'm invested in the 2045 fund, which is hopefully, when I will retire. And ultimately, that fund just keeps getting more conservative over time. The only decision I made was, what year am I going to be invested in? And so we've got a suite of nine funds. For the youngest participant, who's just entering the workforce today and is 23, 24, 25 years old, they would be invested in the LifePath 2060 fund. And then as you go down that path, if you are retiring in the next three years, you would be investing in the LifePath Retirement Fund, which is again, the most appropriately allocated fund for that age cohort.

As a participant, you just need to invest in one fund. And that fund will automatically morph over time as it gets closer to its target date. Ultimately, underneath the hood, as I've mentioned, there is lots of high breadth, lots of diversification, lots of exposure to thousands of stocks and bonds. As we've talked about, US large cap and small caps. So big companies, the S&P 500, the Apples and the Teslas of the world, as well as small cap companies. So the 2000 smallest companies in the US that are experts in semiconductors or what have you, whichever industry. All those industries are covered in terms of the broad market exposure we're delivering under the hood. We've obviously got exposure to Canadian stocks as we are obviously, located in Canada. And our Canadian dollar is important. And we don't want to manage too much currency risk. So we do have Canadian stocks.

We also have international stocks that are combined of Europe and the developed international markets, but also emerging markets, which include Brazil, India, China, where the growth is going to come from in the future, as those markets are continuing to grow quite rapidly. So that's the stock complex, very broadly diversified, lots and lots of exposure to different stock funds all around the world. But also, we have exposure to alternatives, as I mentioned. We have exposure to global REITs, real estate investment trusts, whether it's a publicly held building or a privately held building, that building also has some value. It's going to grow. But they also have the ability, those building managers, have the ability to increase rents if there's inflation in the marketplace. And so we want that inflation protection in the portfolio as well.

If the bank of Canada hits its 2% inflation target over a year, the 1 million bucks we have today will buy us very different things 40 years from now, because of that inflation. That 1 million bucks today might actually buy us $500,000 worth of stuff 40 years from now because of inflation. And so we want to have inflation protection in the portfolio as well. You're getting some of that from stocks, but important to get some of it from real estate, infrastructure, things like toll roads and airports. They can also increase prices as inflation goes up. And so we want to have that exposure in our portfolio. And then the ballast in the portfolio, as we've talked about, the ballast is bonds. We all know that bonds dampen volatility. They act in different ways versus stocks. They tend to be the more protection part of the portfolio. And so as we approach retirement, we want to include more bonds in the portfolio, both nominal bonds.

So just bonds that are issued by the Canadian government and Canadian corporations, but also some real return inflation link bonds that have a direct tie to inflation. If inflation goes up, the interest rate on that bond goes up. And so we're embedding that kind of inflation protection in the portfolio as well. So lots and lots of different assets in this portfolio, which makes it that high breath and long horizon type of portfolio that we've talked about. For a strategic long term view, this is the appropriate portfolio to be invested in over the long term. We know that in DC plans and group RSPs there's a lot of inertia. We know participants kind of buy and stay in that portfolio. And so this works really well for that type of investment strategy. It's buy and hold. You buy the fund that's closely responding to your target date. And you stay in that fund and it automatically adjusts appropriately over time.

So that is the premise behind it. This is the gold standard in terms of how all big corporations, big investors are delivering a group RSP type plan to their participants. Everybody is using target date funds as the main building block for participants, just so it makes it easier for participants to make that one decision. And ultimately, it's invested by a professional management suite. And again, as I mentioned, BlackRock has been doing this since 1993. So we have thought, and we have evolved over that 25-year history on how we should be managing these funds. We've added new asset classes. We've changed our risk budget. We've done lots and lots of different things over those 25 years.

And we will continue to evolve these portfolios to make sure they stand the test of time and they're evolving with the markets and evolving with participant needs as well, your own employee need, as we need to secure that better financial future for ourselves, taking one single portfolio in time. And we could do this for each and every one of those target date portfolios, the 2050, the 2060, the 2030. What we're doing here is just looking at the LifePath retirement portfolio, the portfolio that's the most conservative and appropriate for those people who are in their 60s, approaching retirement and want to kind of have a portfolio that will last them all the way through retirement. 60% of the portfolio is in fixed income or bonds that are preserving that capital, preserving that balance that the participant has grown over their 40, 50 years of working. We want to make sure we're protecting that balance that they've built.

And so that bond portfolio, the 60% of bonds, will help in that protection and deliver sort of that inflation protection that we're looking for. And then the 40% of stocks, all US, Canadian and international, will help the portfolio continue to grow. Because again, in retirement, fortunately or unfortunately, we don't know when we will actually exactly die and so we want to make sure that that portfolio is growing so that we manage each individual's longevity risk. The longevity risk means that you as an individual might be the person that lives up to 90, 95 to a hundred. And so we don't want to run out of money in retirement. And we want to make sure that even our retirement portfolios continue to work, continue to grow. Even as you, as a participant, might be withdrawing assets from it to make sure that you've got that living standard that you want in retirement, you still want the portfolio to grow. And so that is kind of the basis and the premise of thinking about that retirement advantage as we get closer to retirement.

The early portfolios are about a hundred percent stocks and stock-like allocations. And as you start moving closer to retirement, every single quarter, as we get one quarter or one year closer to retirement, BlackRock is adjusting those portfolios to include more bonds and less stocks, and a little bit more real estate, infrastructure, commodities to protect from inflation or unexpected inflation, and to protect those portfolios as we get closer to retirement. And so this is the glide path or the path that each portfolio takes over time to get to the retirement portfolio and to help participants and employees such as yourselves get to that retirement with an appropriate mix of stocks and bonds all the way through, based appropriately on your age, your time horizon, that you have left to work, and your time horizon left that you have to retire and in retirement. So this is all thinking about that entire life cycle of a participant of an employee.

Thinking about that life stage of all the stages that we may go through in our life, from early on when we don't have a lot of money to invest, but we have a lot of time horizon, we have a long time span, we want to lean into growth. We want to lean into stocks. As we build that balance in our 30s and 40s, our retirement RSP balance gets bigger and bigger. As it's been growing, we want to start protecting it. And we want to include bonds and inflation adjusted bonds in that mix to protect that portfolio. And so that's what we are doing. It's happening automatically within the fund in a way that's been researched and thought about very carefully by BlackRock and its hundred member team of folks that are looking at this and managing this type of strategy all the way through its life.

And so for a participant, again, all they need to think about is kind of the year they're retiring. It's super simple. All you need to do is think about, "Hey, what age am I going to turn 65 or 62?" In Canada, we know that the average life expectancy is actually about 62. Most people don't even get to 65. So as we think about what that life expectancy is, or when we think we're going to be working to as professionals, it varies. Certain professions, OMA doctors, others, professionals who are in the finance industry or professors, they tend to work longer. They tend to work beyond 65. So we just want to think about, when do we think we will retire? When do we think we will need that money? And then invest in the appropriate LifePath fund that matches that date.

And then ultimately, it's on autopilot. And ultimately, BlackRock is managing that portfolio over time to make sure that it is well adjusted and morphing and becoming more conservative over time. And it's appropriately allocated across stocks, which are growth providers, across real assets, real estate, infrastructure, commodities, which will provide you that inflation protection. And across bonds, which will provide you that capital preservation and that kind of fixed income that we're looking for in retirement.

I wanted to touch on one other element, which is environmental, social, governance. We are hearing a lot about this whenever you open the paper, whenever you open any kind of show on TV, in terms of finance and investments, everybody is talking about ESG, environmental, social, governance, climate change. These are all topics that are very topical today, not only from just a broad kind of environmental standpoint, but also from an investment standpoint. How are we as stewards of capital? Stewards of participant capital? Your capital and your assets, how are we managing these risks, these environmental, social, governance risks? Now, BlackRock is a fiduciary. We are a fiduciary to our funds, which means we have a duty to protect and enhance the value of those funds. We have to look at the best interests of funds and all the participants in the funds. We are not looking at the best interest of BlackRock as a fund manager.

Our fiduciary obligation is to look into the best interests of those fund participants. And so when we think about those issues, those environmental, social, governance issues, BlackRock actually frames that corporate governance activity, including the assessment of environmental and social governance issues as an investment context. We are thinking about that within our investment stewardship team. As we think about stocks, every single stock that we own on behalf of our clients, that you own, we will vote those stocks. We will vote proxies. We will vote on directors. We will vote on proposals that those companies put out and we base our voting on those sound governance principles that think about environmental, social, and governance issues, because we are focused on the long term.

We're focused on long-term sustainable financial outcomes for our funds and for the participants in our funds. So when we are thinking about these issues, we are engaging with all the companies that we hold, all those companies in the index funds. We're engaging with them to ask them about these long-term sustainable financial outcomes. And we're holding the directors and the companies accountable for how their action or their inaction in thinking about those issues. And so this is a part of what we think about when we're managing any funds, any company that we hold on behalf of our participants. We have to vote those shares when they have a proxy and they have to vote those shares, because we're the owners or we're acting as the owners for our clients. We're acting in our clients' interests.

And ultimately, we are going to be supporting those companies that are delivering a sustainable long-term performance in light of climate, environmental, social, and governance issues. If you don't have a social license to operate, you're not going to be able to actually deliver returns to clients in terms of profits, if the social license is gone. And so we're talking to clients, talking to every single company that we own and engaging with them on these issues on a regular basis. This is part of who we are at BlackRock. If you Google BlackRock sustainability, this is kind of a project that we've taken on with a lot of seriousness. We believe climate risk is investment risk. We believe environmental risks are investment risk that have to be taken into account. We believe that a lot of them are not being appreciated by the market today.

And so we are sort of a step ahead of everyone thinking about these types of issues and positioning our portfolios and thinking about our portfolios in this context. Not only currently, but even as we evolve these portfolios continuously, as we look at other assets and other asset classes and how to implement even our Canadian holdings or our US holdings or any international stock holdings, we are thinking about these issues and planning on how we need to evolve our portfolios to give even more of an emphasis on these types of issues. Because we believe as we go through this climate change and carbon transition that there are going to be winners and losers over the next 30, 40 years. And we want to make sure that our portfolios are appropriately capturing that and positioned well, again, for the long term sustainable outcomes that we want to deliver to our participants that are in these funds.

Preya Singh-Cushnie: Great. Thank you, Farzan. That was incredible information. It just shows the breadth and experience and tenure of BlackRock. And I know OMA Insurance is extremely excited to have BlackRock as our target date fund manager in the program. I just wanted to make mention that this program is a two-time award winning program. And it is because of the plan innovation and taking steps towards leading the space in terms of finding a defined contribution group retirement savings program. So we're extremely proud of that, being only about 12 or 11, what, 13 months old now?

So thank you, Farzan, for being here today. Thank you everyone for listening. That's all we have time for. If you do have further questions and want more information, please visit us at OMAinsurance.com/retire or book an appointment with an OMA Insurance advisor or someone from my team and we'll be happy to help you. Thank you. And please enjoy the rest of your day.

Audio: The Financial Checkup series is produced in collaboration with OMA Insurance and Commonwealth, the administration and technology partner for the Advantages Retirement Plan.