have a component very correlated to the stock exchange

While opens soon in France the crucial debate on pensions, a new type of savings products will be available soon in France. Born in the United States 15 years ago, life cycle or maturity funds are funds diverse several asset classes. They alter the distribution based on the proximity of the retirement of the individual. At the start of his active life, the investment is quite aggressive, with a strong share invested in shares, which reduces the lifetime to protect the accumulated capital. The rule is to invest 100 - age of the individual"on stock assets. Thus, a person 30 years of age should invest 70 of its capital stock.

Only, the studies have shown that reduce the weight of the shares of 1 per year led to disastrous results, particularly across the Atlantic and through the crisis (see below). People who were at 5-10 years of retirement and who suffered the stock market correction of 2008 should, according to the logic of the life-cycle funds, continue to decrease their investments in shares, this prevents them to take advantage of the rebound of the awards and to regain some lost ground. They thus lose the benefit of the return to the average which sees assets usually bounce after heavy.

"The modification of the allocation of assets of the Fund to life cycle remains too simplistic: it does not account for the evolution of the conditions of market, or aversion to the risk of individuals.". "Thus, some of them will want retirement approach to ensure a guaranteed minimum amount while others will be willing to waive in part in exchange for the opportunity to take advantage of opportunistic way to market developments (rebounds...)", explains Lionel Martellini Scientific Director of the Edhec Risk and Asset Management Research Centre. "Maturity funds remain a good answer to the problem of pensions" that they incorporate two new factors, the aversion to the risk of the individual and market conditions.

Possible refinements

"Our work shows that it gets then certainly less satisfactory than the pure custom, but well above the traditional approach of life-cycle funds that takes into account that in the age of the individual." "So with 3 profiles types of individuals - prudent, normal and adventurous - and classified market conditions into three categories - adverse actions, neutral and friendly-, it gets a reasonable number of"possible cases"and allowing a much better understanding of risk," said Lionel Martellini. "Refinements are possible, such the introduction in the menu of the classes of Fund assets to maturity of products such as the inflation-indexed on inflation, which offer a preservation of purchasing power," says the researcher.

Another conceptual improvement possible, but difficult to implement, reconsider the assumption that an individual should be very exposed to actions at his young age and just prior to his entry into life active. Indeed, the revenue stream that it will collect in the future, through its human capital (skills, diploma...), have a component very correlated to the stock exchange. Schematically, the revenue it will receive during his active life are correlated to part to dividends. Wage increases usually when stock markets are well oriented (1). Without even the lesser title portfolio, an individual is exposed to the stock exchange through its future wages, which must not induce too invest equity.

Revitalize the PERP and Perco

In France, the UFG - CSA Group, which has sponsored the work of the Edhec funds at maturity, reflects on the launch of such funds for its private customers. Unlike the United States (see the illustration) and the Canada, the public is not yet in Europe the target for this type of solution of retirement. There resort to other solutions, which are free from defects. Thus, in France, life insurance, and its 1,250 billion of assets, is one of the vehicles of choice in this perspective. Problem, it guarantees a rate of return nominal and not real, and is therefore not a protection against inflation and the preservation of the purchasing power of savers. The principle at work in the life-cycle funds could be systematized and streamlined the PERP or Perco, two current solutions still poorly developed in terms of assets, but in growth would be a means of stimulating growth.

One of the important advantages for management companies that would provide funds to life cycle is to retain and still retain their customers. Indeed, such products are really interest only if they are kept for a long time, until the retirement in the ideal, quite clearly linking clients to their management company. At the same time, use also limit investments that individuals can make in other managers. If they for significant amounts then the overall distribution of their portfolio on the different asset classes will be modified. It is well that that the life-cycle Fund is supposed to fly, and only. An individual who would invest too much outside the framework of its life-cycle funds would thus see its allocation of assets changed, which considerably reduces the interest to resort to a maturity Fund.