T. Rowe Price's Jerome Clark on Target Date Funds

Bobby Blue: My name is Bobby Blue. I'm an analyst on the multi-asset and alternatives manager research team here at Morningstar. Joining me today is Jerome Clark, portfolio manager on T. Rowe Price's target-date strategies overseeing more than $250 billion of assets across various products. Morningstar named Jerome the winner of the 2020 Outstanding Portfolio Manager Award, recognizing his achievements in delivering successful retirement outcomes for investors in his funds as well as for really pioneering the target-date structure as a retirement vehicle.

Jerome, it's great to talk with you.

Jerome Clark: Thank you very much. Glad to be here.

Blue: Jerome, you've won this award based on your achievements as the manager of the T. Rowe Price target-date series, which started in 2002, but that's obviously just part of your story. If you could go back further to when you started your career, what's really informed the way that you look at the world? Is it your experiences, different mentors that you had? If you could just expand on that a little bit.

Clark: Well, I actually have a pretty unique background relative to most portfolio managers at T. Rowe Price. I came from a military background, graduated from Naval Academy (indiscernible) years. I would say a couple of things from that experience informed some of the things I've done at T. Rowe Price. One of things the Marine Corps teaches you is the preparation you do when times are normal and things are kind of quiet really prepare you for when things are volatile and things are really moving and fast-paced, and that can be more important.

And so, when I look at retirement outcomes and there's a lot of focus, particularly in bear markets on what's going on at the moment, what I always keep in mind is that a lot of times what really can be the most important times are when things are quiet and what you're doing in those times.

The second thing is, after nine years getting out of the Marine Corps, I didn't have any retirement savings because I didn't stay in 20 years. So, I was acutely aware that I was behind the curve. So, even before I got into asset management, I was really trying to figure out: What are the ways that I can catch up with my peers who are ahead of me who didn't do nine years and got out? And this is a problem--it's a challenge that a lot of Marine Corps or a lot of military do have if they don't the 20 years. So, that told me that--even though I came in as a fixed-income manager, I was acutely aware that for myself, if I was going to be prepared for retirement, I had to have an adequate exposure to equities.

And then, lastly, in my last duty station, I was teaching math at the Naval Academy. I was teaching probability statistics, differential equations, calculus. The probability statistics, really, that was my favorite thing--is really in the numbers and teaching midshipmen why statistics were important. So, when I was looking at statistics, when I was looking at the numbers, and we were running these models, I really, really focused in on them. I felt they were really important. So, we concluded we had to do something radically different. When you looked at the numbers and when I looked at what I needed personally and I looked at the challenges that many had, I wasn't the only one unique in that I was undersaved, and it really was a compelling story that we raised eyebrows both within T. Rowe and outside of T. Rowe Price when we took this different approach of higher equity relative to others.

Blue: I definitely want to get to that a little later on. But when you joined T. Rowe, you joined as a fixed-income analyst, and then you went on to become a fixed-income portfolio manager. Could you talk about that and how that's informed your management experience?

Clark: Sure. First, I came in as a quantitative analyst within the fixed income. So, I was right within the scope of my background teaching in the math department and then became the fixed-income manager. So, working on the fixed-income side really gave me a good understanding when I moved into asset allocation of the benefits of the fixed-income components. And a lot of investors out there, when you look at it, there's a lot of--we call it barbell. They're into cash or in equities. They don't really--bonds are a little bit more mysterious, and so because of that a lot of individual investors avoid it. Having that in my background, that really gave me an understanding of what the benefits fixed income would bring into an asset-allocation portfolio. And so, that helped inform me when I moved into that arena into looking more holistically, not just within fixed income but paying attention to international markets, equity markets, and fixed-income markets.

Blue: Maybe now if we could go back to the period that you took over the target-date funds in 2002. At that point, they were a relatively small part of the market, kind of a niche product. T. Rowe Price was one of just a few providers in the space. I was just curious: Your thoughts on when you started out, did you foresee the success of these products? Did you see something inherent in them that led you to believe that you would one day be overseeing a $250-billion-plus franchise?

Clark: Well, it was shocking, the success that we had. What got me interested in this product area was, first, my experience with college savings plans. By the time I had launched college savings plans, and what I noticed is that when we built these--I'll call them target dates but for college savings versus individual offerings--what I noticed is about 70% of individuals were investing in this asset-allocation product that kind of packaged everything for them versus trying to figure out how to save for college for their children with the individual components.

That got my attention as, "Well, what's going on in the retirement world?" And when I looked into that, I saw, as you indicated, there were a small sliver of assets and providers that were providing target dates, but I was convinced, given what I was seeing on the college savings side, that it would be applicable to retirement, if not more applicable on the retirement side. I made the case to management. What I assured them of is that I felt we could really, in five years, if we could do $2 million, and if we were lucky, we're going to even do $5 million. Well, five years later, we were at $30 billion. And that was just after PPA was passed, and that's when we really took off and we were already 6 times of what I thought the most we could get. So, it was a shock to the company. It was a shock to me, a pleasant one indeed.

Blue: What's driven their success do you believe?

Clark: Right. So, I'd say there were three things, and it's 1) it resonates with plan sponsors. It resonates with plan sponsors because it addresses a lot of the challenges that they've had getting participants to invest in the right way, which can be pretty challenging given that the plans have tended to be hands-off, and what plan sponsors were finding is that they needed to be more hands-on and automate things for them, make it easier for the participants.

And once these products were introduced into the 401(k) plans, what plans sponsors found is it really resonated with participants. We were seeing increases in participation once we put them in the plan. In a quarter, it was over 1% per quarter the participation rate that was going up, which is tremendous within 401(k) plan. And that's why you see now many plans are moving north of 50% of their assets that are in 401(k) plans.

And the last thing is that, in 2006, PPA was passed, which gave asset-allocation products, such as a target-date, safe harbor if a plan sponsor selected it, which gave plan sponsors much more comfort implementing it into their plans. And as I said, once they did that at a much higher rate, participants really adopted in a high manner, which drove the asset growth that you see.

Blue: One of the hallmarks of your tenure as a portfolio manager and really the T. Rowe Price target-date series is the amount of equity exposure that this series takes really across all points of the glide path relative to industry peers. You argue that it leads to more successful outcomes for retirees. Of course, the flip side is increased volatility. You've navigated the fund through some pretty dramatic periods, 2007-2009, and now again during the coronavirus crisis. At any point, did you have reservations about those changes?

Clark: No, and it goes back to the discussion about what the Marine Corps taught me is pay attention as much to when things aren't volatile as when they are volatile. And so, what we find, and it's pretty compelling evidence, is in the modeling is that, if you're outcome-driven--and that's the one thing that we did differently, I think, at the beginning, I think most target-date providers are focused on outcomes--is that we were focused on long-term outcomes, and when you looked at that, it was a really compelling argument that you needed an adequate exposure to equities.

That being said, volatility does matter. In these down markets, we understand the challenges of staying the course. What we find, though, is that these products actually change behavior, and that because they are asset-allocation products and they are diversified and they have fixed income, which tend to offset in a down equity market, that participants do behave differently, they do react different in these down markets. And so, they tend to weather the storm of down markets better than they would if they were in other types of products.

The other thing is the targeted market actually is a narrow window when you look at the difference in allocations between them. The typical equity at the high end is, say, for at retirement, is someone like a T. Rowe Price that is at 55% equities. But when you look at other providers, it's very rare that you find equity exposure that is lower than 45% or 40%. That's a small difference. Those small differences in a down market--you tend to have the same type of behavior, the same type of volatility. We're going to have some greater volatility, but it's going to be incremental, but in the long run those small differences in outcome and expected returns are going to just increase over decades, and you're going to get that benefit. So, it's long-term outcomes and returns versus short-term market environments.

Blue: Jerome, you're moving on from portfolio management responsibilities at the end of the year, but I imagine you're going to be keeping a close eye on the work that the team is doing. What do you view as the next frontiers in target-date investing?

Clark: I'm excited about the new role. It's more strategic initiatives. I've turned the reins over to Wyatt Lee, which I'm very excited about. He's been working with me for 15-plus years, been my partner in crime when it comes to managing the target-date products. As far as the future goes, a lot of it is tied to target dates. I would say there's not a provider out there that is looking at ways to potentially incorporate managed accounts into target dates, what's called smart QDIA, the marriage or partnership of target dates through accumulation up to retirement, sometime during that, what we call the red zone, switching over to potentially a managed account, which is more personalized. And that might potentially be a better mousetrap for an investor because we're all more similar than we are different when it comes to accumulation. But when it comes to retirement, we become more individualized and more unique in that we have different tax rates depending upon where we are, spousal assets. All these different considerations come into play. And so, an approach like that, that brings these two together, might be a real solution for some investors out there. So, I'm spending a lot of time with others at the company exploring that. And then, of course, no surprise, retirement income. We're spending a lot of time at T. Rowe Price seeing if there's potential ways to bring retirement-income offerings within a target-date product for our investors out there.

Blue: Jerome, it's been great to hear your thoughts on the target-date space, but I'd like to close by taking a step back. The past few months have seen an increased urgency for racial equity in different industries where there are significant disparities in terms of pay, headcount, advancement opportunities for people of color, and I know this is an area that you've spoken out on in the past. Putting aside the obvious introspection that investment organizations themselves should be doing right now, what role can asset managers play in furthering these necessary initiatives within some of their portfolio holdings?

Clark: Well, as you can guess, I'm pretty interested in the topic for obvious reasons. But the other thing is I've just been placed on our Black Leadership Council at T. Rowe Price, so paying a lot attention to that council is working with management. A lot of things that can be done, and in the best interest of--what we do know is that, statistics again don't lie, and what we find is that, statistically, those companies that do a good job of diversification and inclusion tend, the numbers just show, tend to do better than their counterparts that don't. So, internally and externally, it's an emphasis.

So, the way I would put it is, T. Rowe Price puts their vote where their mouth is. So, when it comes to, for example, board memberships of other companies and where we have significant holdings, we have a role when it comes to proxies, that is a consideration that we take into account in the way that we vote. And this is not just looking externally within our own company. Our own board is highly diversified, both from a diversity and a gender perspective. So, in all kinds of ways, it's highly diversified. So, we're putting our mouth where money is, and we're putting our vote where our monies are.

Blue: Jerome, thanks for your time this afternoon. It was great speaking with you and again, congratulations on the award.

Clark: Thank you very much. I'm very honored.