Morningstar's Conservative Retiree Portfolio Relies Heavily On Bonds -- Needs Management Help
02/18/2011 0 comments
ETF |
% |
|---|---|
| Megacap (MGC) | 13 |
| Mid Cap (VO) | 4 |
| Small Cap (VB) | 2 |
| Foreign Equity (EFA) | 5 |
| Emerging Market (VWO) | 1 |
| TIPs Bond (TIP) | 25 |
| Short Term Bond (BSV) | 13 |
| Inflation Protected (WIP) | 4 |
| MBS Bond (VMBS) | 10 |
| Corporate Bonds (LQD) | 16 |
| Cash | 7 |
This can be summarized in major asset classes as:
|
Asset Class
|
Ownership
|
|
US Equities
|
19%
|
|
International
|
5%
|
|
Emerging Markets
|
1%
|
|
Fixed income
|
75%
|
3. International and emerging markets will have limited impact on the portfolio.
Points of note:
1. This puts heavy emphasis on fixed income and with recent history being a bad time for bonds, it might be worth considering actively managed bond funds.
2. The risk assets are very heavily weighted towards US Large Cap equities and those have been on the lower end of the returns table over the past five years.
With MPIQstrategic asset allocation ownership of each risk asset class will remain constant:but will be equally balanced. There will also be rotation of sub-classes to find the best performing fund in the mix.
|
Asset Class
|
Ownership
|
|
US Equities
|
9%
|
|
International
|
8%
|
|
Emerging Markets
|
8%
|
|
Fixed income
|
75%
|
MPIQ Tactical asset allocation ownership will be dependent on asset class momentum on a monthly basis. Under most operating conditions, 75% will be fixed income and 12.5% will be designated to each of the top two asset classes -- unless they are underperforming fixed income, in which case it will become fixed income. If fixed income is underperforming cash, fixed income will move to cash
|
Asset Class
|
Ownership
|
|
US Equities
|
12.5% or 0
|
|
International
|
12.5% or 0
|
|
Emerging Markets
|
12.5% or 0
|
|
Fixed income
|
75, 87.5, 100
|
We are going to compare results of: 1. The portfolio as proposed by Morningstar
2, A strategic asset allocation portfolio using the funds proposed by Morningstar
3, A strategic asset allocation portfolio using the funds proposed by Morningstar
2, A strategic asset allocation portfolio using ETFs to clone the funds proposed by Morningstar for their own 401K plan
3, A strategic asset allocation portfolio using tETFs to clone the funds proposed by Morningstar for their own 401K plan
Portfolio Performance Comparison
Portfolio Performance Comparison
| Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| Morningstar 401K ETF Clone SAA 75 | 17% | 155% | 3% | 18% | 6% | 31% |
| Morningstar Retiree Portfolio SAA 75 | 10% | 162% | 1% | 8% | 4% | 30% |
| Morningstar 401K ETF Clone TAA 75 | 9% | 152% | 4% | 67% | 6% | 81% |
| Morningstar Conservative Retirement Potfolio Original | 8% | 196% | 3% | 43% | ||
| Morningstar Retiree Portfolio TAA 75 | 6% | 114% | 2% | 29% | 4% | 49% |
Takeaways: Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
We note that WIP was replaced with BND because WIP only has two years of history and we wanted a little more. We don't believe that this will substantially alter the resutls.
A conservative portfolio is either for those who dislike any form of risk or those who have a shorter time horizon. In either case, the reliance on fixed income in a period of time when fixed income is out of favor is not ideal.
Given that so much is given over to fixed income, it would make sense to seek out a managed bond fund such as those offered by PIMCO, even if that means leaving ETF's for that portion.
The alternative to stay in ETF's is to allow the strategy to migrate between bond funds (so use a degree of management) to help limit downside and increase the upside.
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