Target Retirement Annual Review

Expecting the Unexpected: Evaluating our strategic approach to inflation protection

  • DESIRABILITY Would enacting this change to the glidepath be expected to improve participant outcomes?
  • SUITABILITY Is the investment decision under consideration suitable for all DC investors?
  • INVESTABILITY Can we implement this investment theme efficiently?
Investment Strategist
Senior Portfolio Manager

Each year, State Street Global Advisors conducts a comprehensive review of its target retirement strategies. The annual review process is driven by the Defined Contribution Investment Group (DCIG), which blends asset allocation expertise from State Street’s Investment Solutions Group with defined contribution (DC) market insights from the Global Defined Contribution team. The review follows a consistent and transparent framework to reassess the capital market expectations and demographic assumptions that underpin the glidepath, while also evaluating new asset classes and investment themes for inclusion in the investor portfolios. The process is grounded in three key criteria: desirability, suitability1 and investability.

Last year’s review, in which we introduced US Intermediate Government Bonds to the glidepath, was influenced by historically low yields – and weaker long-term return expectations -- in fixed income following the initial wave of the COVID-19 pandemic. This deflationary event delivered significant headwinds for risk assets, most notably equities, but also inflation-sensitive growth assets like Commodities and Real Estate Investment Trusts (REITs). Thus far in 2021 we have experienced a very different market environment. Record stimulus, reduced lockdowns and improved economic activity have driven a period of strong equity returns against a backdrop of heightened inflationary pressures and an upward trajectory for bond yields.

While headlines have focused on near-term inflationary pressures and price spikes, longer-term inflation uncertainty continues to rise with consumers anticipating higher prices in the coming years. The September, 2021 Federal Reserve Bank of New York’s Survey of Consumer Expectations revealed that both short and medium-term inflation expectations moved higher for the eleventh consecutive month, hitting the highest reading since the series’ inception in 2013. The survey’s median one-year ahead expected inflation rate reached 5.3% while the median 3-year ahead rate rose to 4.2%.2 Furthermore, market-based probabilities generated by the Federal Reserve Bank of Minneapolis were pricing in nearly a 40% chance that the average inflation rate will exceed 3% over the next five years.3 The US Federal Reserve’s (Fed) decision to implement average inflation targeting could allow for inflation to run hotter for longer, and well above their 2% long-term target, as the Fed focuses on unemployment and supporting growth. Current inflation expectations along with realized inflation surging to its highest reading in 40-years have the potential to create a structural shift towards higher inflation that would present investors with a challenge they have not needed to position for in decades.

Source:  Survey of Consumer Expectations, © 2013-2021 Federal Reserve Bank of New York (FRBNY).  The SCE data are available without charge at and may be used subject to license terms posted there.  FRBNY disclaims any responsibility or legal liability for this analysis and interpretation of Survey of Consumer Expectations data.

While factors like technological advancement and aging demographics suggest that long-term inflation expectations should remain anchored and consistent with the Fed’s inflation objective, the current period of heightened uncertainty has served as an important backdrop for evaluating the efficacy of the inflation-sensitive asset classes used in the glidepath. Inflationary risk is most impactful for participants approaching and entering retirement. These participants have fewer working years to offset the impact of inflation through wage growth, and hold a higher allocation to nominal bonds, which are most susceptible to the erosion of purchasing power in periods of high inflation. The State Street Target Retirement strategies have historically maintained a 26.5% strategic allocation to inflation-sensitive assets in retirement. Our use of a diversified mix of asset classes, Commodities, REITs and TIPS, play a key role in balancing investment risks for retirees – protecting participant purchasing power from inflation, while providing growth potential and addressing market volatility. The key question we sought to address: Does this strategic allocation address inflation appropriately in order to deliver successful outcomes on behalf of participants, or can it be improved upon?

Topics of Review:

  • Potential introduction of listed infrastructure equities to the glidepath.
  • Index selection within inflation-sensitive exposures.


  • No changes to the glidepath for 2022

For our 2021 review, we looked at listed infrastructure equity’s impact within the glidepath. While infrastructure has a shorter track record than many inflation-hedging asset classes, it has historically offered an efficient risk/return tradeoff, strong inflation hedging characteristics and a high dividend yield. We did not seek to increase our overall allocation to inflation-hedging asset classes, as moving above our existing 26.5% weight may begin to adversely impact our focus on longevity and market risks. Instead, we focused our review on whether infrastructure – when funded at the expense of existing components of the inflation-hedging basket – presents enough of an improvement in expected outcomes in order to justify inclusion in the glidepath.

Each inflation-sensitive asset class we hold today has a specific purpose for participants in retirement. Commodities have consistently offered the highest degree of beta – or sensitivity – to periods of high or unexpected inflation, delivering significant inflation protection at a modest portfolio allocation. Global REITs have historically performed well during periods of economic growth, and offer a high dividend while demonstrating a strong relationship with inflation. We also continue to value TIPS exposure as an anchor to our inflation approach, addressing capital preservation needs while delivering a strong historical correlation with CPI. Infrastructure offers the potential to modestly improve portfolio efficiency, however funding the allocation at the expense of any of these exposures would have a de-minimis impact on expected participant outcomes while potentially adversely impacting the overall portfolio’s sensitivity to inflation. This ultimately resulted in the group’s decision not to make changes to the glidepath.


Would enacting this change to the glidepath be expected to improve participant outcomes?

The State Street Target Retirement glidepath allocates 26.5% to inflation-sensitive asset classes in retirement, comprised of a mix of Commodities, Real Estate Investment Trusts and Intermediate TIPS. The primary objective of these exposures is to efficiently improve the inflation hedging characteristics -- as measured by correlation and beta to inflation4 -- for participant portfolios approaching and entering retirement, within the context of long-term return objectives.

Broadly, infrastructure equities have offered an efficient means of inflation protection, and as a result have emerged as a key component in many Real Asset and inflation-focused strategies. Infrastructure as an asset class has grown considerably in recent years, and offers the potential for capital appreciation, current income via sizeable dividend yield and inflation hedging characteristics through liquid exposure.

In evaluating the potential funding source for infrastructure, we focused our review on Global REITs. The importance of managing longevity risk suggests that exposure to traditional equities, which typically offer the highest long-term return expectations, should not be reduced. Commodities offer strong diversification benefits in addition to a uniquely high inflation beta, materially increasing the overall portfolio’s sensitivity to inflation at a modest portfolio weight. Intermediate TIPS offer lower risk levels as a fixed income asset class in addition to a strong historical relationship with CPI, and reducing this allocation would materially impact the risk profile for participants approaching retirement – exposing participants to greater levels of market risk.


Global Infrastructure

Global REITs
10 Years
Annualized Return 7.9% 9.3%
Annualized Risk  13.9% 15.0%
Upside Capture 47.9% 53.6%
Downside Capture 90.0% 88.0%
Max Drawdown  -30.3% -29.0%
Dividend Yield (12 month)  3.06% 3.15%
Common Period Inception (2001)
Annualized Return 9.3% 9.2%
Annualized Risk 15.2% 18.3%
Upside Capture 57.7% 86.0%
Downside Capture  95.7% 98.5%
Max Drawdown  -52.7% -67.2%

*Source: State Street Global Advisors, Factset as of September 30, 2021. Characteristics are as of September 30. Inception data is from 11/30/2001-9/30/2021. Upside and downside capture are benchmarked against the MSCI ACWI Index. Infrastructure represented by the S&P Global Infrastructure Index while REITs show the FTSE EPRA NAREIT Developed Index. Past performance is not a reliable indicator of future performance. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.

Comparing characteristics of the two asset classes shows notable similarities, with a few key differences. Historically, REITs have been a more growth-sensitive asset class, participating in a larger percentage of the upside in periods of economic growth at the expense of higher volatility on a standalone basis.5 This has benefited investors over the last ten years, however expanding the time horizon to include the global financial crisis in 2008 shows the potential for higher drawdowns in a ‘worst case’ scenario, which has led to weaker overall performance over the since-inception time horizon. REITs as an asset class have grown substantially since then, and has consistently offered a stronger tradeoff of upside/downside capture, with comparable max drawdowns over this more recent period, which includes the first quarter of 2020.6

Looking forward, judging purely by the impact on expected efficiency, there is a strong case for infrastructure in the glidepath. Using State Street’s current Long-Term asset class forecasts, we project a 5.6% annual return for infrastructure compared to 3.6% for Global REITs over the next decade. This suggests that replacing the 5% allocation to REITs with infrastructure would lead to a 10 basis point increase in return expectations for participants in retirement. Within this framework, infrastructure may meet the desirability criteria in that it potentially improves risk-adjusted returns if established at a meaningful weight.

However, keeping in mind that the primary objective of these exposures in retirement is to balance key investment risks, maintaining growth while delivering a smoother return profile through different inflationary environments, it is important to review the relative merits of each asset class in this context. Global REITs offer investors a unique blend of inflation protection combined with the potential for capital appreciation and current income. Looking back 30 years to 1991, REITs have often outperformed equities and bonds in periods of moderate and higher inflation, while also delivering competitive returns in periods of lower inflation.7 Since its inception in 2002, global infrastructure equities have performed broadly in-line with global REITs during various inflation regimes, however the asset class does not offer the same lengthy track record as Global REITs.8

The historical growth characteristics and return profile from Global REITs suggest that the asset class plays an important role in the glidepath. If removing REITs entirely is not desirable, the potential allocation to infrastructure may be more modest, and ultimately less impactful. Suitability for participants, namely analyzing the efficacy of each asset class as an inflation hedge, is an important additional step in weighing the relative merits of each asset class.


Is the investment decision under consideration suitable for all DC investors?

Reviewing the suitability of a change to participant portfolios begins with how that change aligns with addressing the key risks. These participants face a complicated mix of investment objectives – seeking to accumulate enough wealth to address longevity risk, while managing against erosion of purchasing power and equity market drawdowns. Through this lens, it is important to consider the multiple objectives of real assets in retirement. Rather than exclusively focus on the potential for a modest increase in return expectation, reviewing suitability requires a deeper look into the inflation hedging qualities of each asset class.

Nominal bonds have historically provided a poor hedge for both high realized and unexpected inflation. Because participants in retirement hold the highest allocation to nominal bonds,9 a meaningful allocation to inflation-sensitive asset classes is key to delivering strong outcomes for these participants across a range of market environments. Maximizing inflation beta within the context of long-term objectives is an important consideration in seeking to offset the impact of potential negative real returns from fixed income.

Why focus on sensitivity to inflation, or inflation beta, rather than simply relying on correlation to CPI? Correlations reveal the strength of a relationship but not the magnitude of an asset’s move to inflation. The inflation beta shows the degree an asset class will move up or down per a 1% change in inflation. Real assets have exhibited positive, sizable inflation betas, and as such a small allocation can be used advantageously toward providing protection from inflation shocks.

Source: State Street Global Advisors as-of September 30, 2021. For illustrative purposes only and not meant to illustrate past performance of a particular fund. Asset Classes are represented by following due to availability of index data: US Equities: S&P 500 Index; US Bonds: BBG US Aggregate Bond Index; Global Infrastructure: S&P Global Infrastructure Index; SSGA Inflation Protection: 19% FTSE EPRA/NAREIT Developed Index, 13% Bloomberg Roll Select Commodity and 68% Bloomberg Barclays US 1-10 TIPS Index; US TIPS: BBG US 1-10 TIPS Index; and US Inflation (CPI-U). Beta is calculated using quarterly returns. Unexpected inflation is calculated by taking the difference between the realized inflation rate (Q/Q change in CPI) and the lagged quarterly 1 year ahead median CPI estimate from the Federal Reserve Bank of Philadelphia Survey of  Professional Forecasters. Past performance is not a reliable indicator of future performance. Performance returns for periods of less than one year are not annualized.

Within inflation-sensitive asset classes, commodities have clearly exhibited the highest inflation beta. This is intuitive, as commodities are considered to be a leading indicator of inflation because commodity prices respond quickly to economic conditions and changes in supply and demand fundamentals. While both infrastructure and Global REITs have demonstrated a sizably higher inflation beta than traditional equities and fixed income, Global REITs have delivered a higher overall sensitivity to both realized and unexpected inflation. To illustrate, an inflation beta of 2.1 means that for every 1% increase in US CPI, Global REITs positively responded by generating a 2.1% return, exceeding that of global infrastructure, and helping to offset the negative impact high inflation has had on stocks and bonds. This is important because global REITs delivers an increased level of inflation protection at a modest portfolio weight (5% of the income fund),10 allowing for a greater allocation to traditional asset classes in seeking to balance longevity and market volatility risks.    

While infrastructure offers a compelling case for inclusion, removing Global REITs from the vintages in retirement would detract from the objective that each portfolio seeks to address. REITs offer growth characteristics, providing the potential for performance in periods of economic growth in addition to periods of high inflation and promoting a more stable stream of returns across market environments. The result of thoughtfully blending Commodities, REITs and TIPS is an income fund that delivers a higher beta to inflation than a portfolio simply holding traditional stocks, nominal bonds and TIPS. Using a larger window of historical data, going back nearly fifty years, this diversified mix of asset class exposures has delivered a strong mix of returns across rising, falling and stable inflationary environments, with consistent outperformance in periods of rising inflation (figure 4 below).

Source: State Street Global Advisors and FactSet as of December 31, 2020

Updated annually as CPI data becomes available. Asset Classes are represented by following due to availability of index data, and dates have been listed where multiple indices were used to attain the full time horizon. Stocks: S&P 500 Index; Bonds: Bloomberg Barclays US Aggregate Bond Index (1976-2018) and Bloomberg Barclays US Corporate/Credit Index (1973-1975); SSGA Inflation Protection: 19% FTSE EPRA/NAREIT Developed Index, 13% Bloomberg Roll Select Commodity Index (1992-2018) and S&P GSCI TR (1973-1991) and 68% Bloomberg Barclays US TIPS Index; US TIPS: Bloomberg Barclays US TIPS Index; and US Inflation (CPI-U). Based on annual calendar year returns with quarterly data. Past performance is not a guarantee of future results. Index returns do reflect capital gains and losses, income, and the reinvestment of dividends. Performance calculated in USD.GlobalREIT (1973-1988) and US TIPS (1973-1998) returns prior to inception of each index are simulated by the index provider. Data is provided since 1973 due to index data availability. Pre-Inception Index Performance shown above is back tested performance and is not a guarantee of past or future results.

We believe that Global REITs continue to merit inclusion in the retirement income portfolio, suggesting that exposure to listed infrastructure would at best be partially funded from the Global REIT allocation. This modest weight to infrastructure would have a de-minimis impact on expected return and efficiency, while similarly modestly reducing the overall portfolio’s beta to inflation. While we remain constructive on infrastructure as an asset class, the case for REITs remains strong, and the proposed enhancements do not justify the added costs and complexities of introducing an additional asset class, and subsequently do not meet the suitability criteria for DC participants.


Can we implement this investment theme efficiently?

Specific to this year’s review, the decision to not make changes to the glidepath was largely driven by suitability. However, a holistic review of our inflation-sensitive allocation prompted an evaluation of the efficacy of each exposure, not only at the asset class level but also index selection and implementation. This is a key consideration for inflation-sensitive asset classes, as there are a broad range of potential exposures to choose from that may deliver very different risk profiles and results.

Using commodities as an example, index selection has a significant impact on volatility, inflation beta and return potential. Focusing on maximizing inflation beta may lead investors to an energy-centric index like the S&P GSCI index, however that added sensitivity to inflation also comes with significantly higher historical volatility than what would be expected from an index like the Bloomberg Commodity Index, which features a near equally weighted mix of energy, agriculture and metals. In the context of the broader Target Date portfolio, seeking to balance inflation and market volatility risks, we have historically favored this more diversified approach. Additionally, when evaluating commodities as part of our regular asset class selection process, we were concerned that the diversification and inflation-hedging benefits would not be fully appreciated due to the roll risks facing passive investors. The Bloomberg Roll Select Commodity Index seeks to limit the negative effects of roll risk. The result is an index that delivers a lower volatility profile compared to more energy-centric alternatives (i.e. GSCI), while outperforming the first-generation Bloomberg Commodity Index by 160 basis points annually over the last ten years.11

Global REITs, which we have covered in detail in this paper, are comprised of a mix of US and Non-US REITs that is in line with our target US/Non-US allocation for participants in retirement. Global orientation has delivered a lower risk profile than US REITs historically, without appreciably lowering the portfolio’s correlation or sensitivity to US CPI.12 In 2020, we expanded the benchmark for our REIT exposure from the FTSE EPRA NAREIT Developed Liquid Index to the FTSE EPRA NAREIT Developed index, expanding market cap coverage to reflect the improved liquidity of the asset class and to improve long-term return expectations.

Another key question in seeking to maximize the efficiency of our inflation-sensitive allocation is the appropriate duration for US TIPS exposure. Prior to 2019, we held both Broad and Intermediate TIPS in the glidepath in seeking to capture yield for near retirees while reducing duration for participants entering retirement via Intermediate TIPS exposure. In 2019, we removed Broad TIPS from the glidepath. Implementing our TIPS exposure using only the Intermediate index provided a significant improvement in expected return, inflation beta and correlation, and reduced duration without significantly impacting portfolio yield. Given the expectation that interest rates will normalize over a longer time horizon, we also reviewed whether to further reduce the duration of our exposure to include short-duration (i.e. 0-5 Year) TIPS. However, we ultimately decided to maintain our Intermediate TIPS exposure, which may be the part of the TIPS curve that benefits most from rising inflation expectations. Additionally, further reduction in yield from moving to a shorter duration alternative is a negative toward total return at a time when return expectations are particularly challenged.

In Closing

The State Street Target Retirement series follows a rigorous, transparent annual review process where investment decisions are constantly re-evaluated to ensure that they reflect our long-term investment beliefs. Following this framework, and avoiding changes based on short-term tactical views, allows the strategy to deliver an intuitive, transparent solution that seeks to maximize value for fee and deliver successful retirement outcomes to participants. Any potential changes are measured in the context of desirability, suitability and investability. Potential glidepath enhancements must meet all three of these criteria, and also display a material impact on expected participant outcomes in order to justify inclusion. While infrastructure equities do qualify as desirable and investable, the existing portfolio delivers a strong mix of inflation-hedging characteristics and the overall impact of a change on outcomes would be de-minimis. At this time, our analysis suggests that a change is not justified on behalf of defined contribution participants.

What does the current mix look like in practice? The State Street Target Retirement Income Fund, which is comprised of 35% growth assets and 65% Fixed Income, delivers significantly higher correlation to CPI and Inflation Beta relative to a comparable mix of traditional equities and nominal bonds. Further, incorporating asset classes beyond the typical allocation to US TIPS – at a meaningful weight – materially improves sensitivity to inflation. The result is a portfolio designed to optimally balance key investment risks, and brace investors for the challenges posed by higher inflation.

*Source: SSGA, Factset as of September 30, 2021. Traditional stock/bond mix is comprised of 35% MSCI ACWI index and 65% BBG Barclays US Aggregate bond Index. Traditional stock/bond with TIPS includes 10% allocation to US TIPS, sourced from Fixed Income, in line with S&P Target Retirement index allocation for the income fund. State Street Target Retirement Income Fund represents strategic weights as of September 30, 2021. For illustrative purposes only and not intended to represent an actual portfolio. Inflation beta and correlation data calculated from March 2002-September 2021.