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  • 401K Investments: Alcoa Savings Plan Review

    10/11/2011

    Retirement investing is a long term process. This report reviews Alcoa Inc Savings Plan MTIA plan, discusses the 401k investment options and presents the plan rating by MyPlanIQ. Asset allocation investment portfolios are examined. Current economic and market conditions are discussed in the context of the investment portfolios in the plan. We will then show how plan participants in Alcoa Inc Savings Plan MTIA can achieve reasonable investment results using portfolio management and risk management strategies for their 401k investments.

    Plan Review and Rating

    Alcoa, Inc. engages in the production and management of aluminum, fabricated aluminum, and alumina. The company is the largest aluminum provider in the world. Alcoa, Inc. was founded in 1888 and is based in New York, New York.

    Alcoa Inc Savings Plan MTIA's 401K plan consists of 13 funds. These funds enable participants to gain exposure to 4 major assets: US Equity, Foreign Equity, Emerging Market Equity, Fixed Income.

     

    Asset Class Ticker Name
    LARGE GROWTH RAFCX American Funds AMCAP R3
    Moderate Allocation RLBFX American Funds American Balanced R5
    LARGE BLEND RICFX American Funds Invmt Co of Amer R5
    DIVERSIFIED EMERGING MKTS MGEMX Morgan Stanley Inst Emerging Mkts I
    WORLD STOCK RNPFX American Funds New Perspective R5
    Foreign Large Growth PRITX T. Rowe Price International Stock
    SMALL BLEND PASSX T. Rowe Price Small-Cap Stock Adv
    Moderate Allocation VGSTX Vanguard STAR Inv
    LARGE BLEND VITPX Vanguard Instl Ttl Stk Mkt Idx Instl Pls
    Intermediate-Term Bond VBMFX Vanguard Total Bond Market Index Inv
    MID-CAP BLEND VIEIX Vanguard Extended Market Idx Instl
    Small Growth MMCIX BNY Mellon Small/Mid Cap Inv
    Foreign Large Value MPITX BNY Mellon International M

    As of Oct 10, 2011, this plan investment choice is rated as average based on MyPlanIQ Plan Rating methodology that measures the effectiveness of a plan's available investment funds. It has the following detailed ratings:

    Diversification -- Rated as average (51%)
    Fund Quality -- Rated as average (45%)
    Portfolio Building -- Rated as above average (81%)
    Overall Rating: average (61%)

    On stock/equity side, it offers various styles (large, mid and small cap) stock funds. Some of those funds are of high quality (such as American Funds AMCAP R3). An excellent moderate allocation fund American Funds American Balanced R5 is available for anyone who prefers using one stop shop fund.

    On fixed income (bond) side, Alcoa's plan offers only one Vanguard total bond index fund (VBMFX) for its plan participants. This is an area that can be expanded.

    Current Economic and Market Conditions

    The U.S. and the rest of the world face long term structural problems that it takes time to correct. The following are some of these problems:

    • The consumption driven economies in developed countries and the export driven economies in emerging countries result in a one way trade flow that can only be sustained for a limited time.
    • Private households in the U.S. are highly in debt, mostly due to the Federal Reserve's loose monetary policy to prop up consumption and living standards. It is impossible to make debts go away overnight without inflicting severe social and economic hardship.
    • Sovereign debt is growing out of control in many countries due to years of relaxed fiscal policies and the recent stimulus driven rescue. It should be noted that this exists not only in developed countries but also in several emerging countries, noticeably in China (adding local government debt, the Chinese government debt would rival the US) and somewhat in Brazil.
    • Uneven productivity and competitiveness of work forces in developed countries and emerging countries. Both productivity and competitiveness can be simply measured by return on investment (ROI), or so called 'cost effectiveness'. We can see this uneven productivity from the difference between German workers and those in peripheral European countries as well as the difference between manufacture workers in the U.S. and those in emerging countries.
    • The relatively decline of K-12 education quality in the U.S., especially in science and technology, makes it more and more difficult for the country to be competitive in manufacturing and producing high tech goods.

    It takes time to correct structural problems as it requires fundamental changes in policies, improvements in productive investments (such as infrastructure upgrade), a better trained current work force and a future generation that is better equipped in science and technology. All this will take time.

    In such an environment, it is key to have proper asset allocation in place for one's retirement investment portfolios.

    Asset Class Trends

    The following table shows how major asset classes such as US equity (stocks), foreign equity, emerging market equity, Real Estate Investment Trusts (REITs), commodities and fixed income (bonds) are ranked based on their price momentum.

    Assets Class Symbols 10/10
    Trend
    Score
    10/03
    Trend
    Score
    Direction
    Gold GLD 7.88% 8.29% v
    Intermediate Treasuries IEF 3.76% 7.81% v
    Municipal Bonds MUB 2.29% 3.67% v
    Total US Bonds BND 2.05% 3.57% v
    Mortgage Back Bonds MBB 1.45% 2.43% v
    US Credit Bonds CFT 1.4% 2.41% v
    International Treasury Bonds BWX 0.87% -1.35% ^
    Treasury Bills SHV 0.05% 0.01% ^
    Emerging Mkt Bonds PCY -0.27% -0.92% ^
    US Stocks VTI -0.74% -10.36% ^
    US High Yield Bonds JNK -0.86% -5.7% ^
    US Equity REITs VNQ -3.32% -11.9% ^
    Commodities DBC -3.68% -8.09% ^
    International Developed Stks EFA -4.28% -14.26% ^
    International REITs RWX -5.45% -13.89% ^
    Emerging Market Stks VWO -10.26% -20.42% ^
    Frontier Market Stks FRN -10.66% -19.69% ^

    For more information on the trends of major asset classes, please see Asset Class Trend Watch

     

    Portfolio Discussions

    The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. For comparison purpose, we also include the moderate model portfolios of a typical 4 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:

    US Equity: SPY or VTI
    Foreign Equity: EFA or VEU
    Emerging Market Equity: EEM or VWO
    Fixed Income: AGG or BND

    Performance chart (as of Oct 10, 2011)

    Performance table (as of Oct 10, 2011)

    Currently Fixed Income, Cash and International Bonds are doing well. Only one fixed income bond fund VBMFX is available to Alcoa Inc Savings Plan MTIA participants.

    To summarize, participants adopting Alcoa Inc Savings Plan MTIA plan can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles. Diversification and proper risk management are the two major key factors in 401k investing.

    Symbols: AA, SPX, COMP, VTI, VEU, VWO, BND, RAFCX, RLBFX, RICFX, MGEMX, RNPFX, PRITX, PASSX, VGSTX, VITPX, VBMFX, VIEIX, MMCIX, MPITX, 401K Investments, Portfolio Management, Retirement Investing

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  • Morningstar's 401K Clone Begs the Question- What about Managed Funds?

    02/27/2011

    We have already examined the Morningstar 401K plan. We explained why it is a model of plan creation - providing a manageable number of funds with broad asset class exposure that enables portfolios that can deliver solid returns. We also provided an ETF clone which enabled portfolios that underperformed the original.

    Performance chart (as of Feb 25, 2011)

    Performance table (as of Feb 25, 2011)

     

    Portfolio Name

    1Yr AR

    1Yr Sharpe

    3Yr AR

    3Yr Sharpe

    5Yr AR

    5Yr Sharpe

    Morningstar 401K ETF Clone Tactical Asset Allocation Moderate

    15%

    112%

    8%

    63%

    11%

    75%

    Morningstar 401K ETF Clone Strategic Asset Allocation Moderate

    17%

    155%

    3%

    14%

    6%

    30%

    Morningstar Inc 401K Plan Tactical Asset Allocation Moderate

    22%

    168%

    13%

    121%

    14%

    125%

    Morningstar Inc 401K Plan Strategic Asset Allocation Moderate

    15%

    178%

    3%

    22%

    5%

    35%

     

     

    The chart is a little misleading as the ETF Clone has fewer choices until recently because of the newness of the ETF funds. If we look at the table and consider just the five year return figures we can see that the strategic asset allocation returns are similar but there is an additional 3% garnered from the original.

    This has prompted further analysis of the funds which we present here.

    We tracked returns for all of the funds used in each portfolio over 5, 3 and 1 years. Some of the ETFs are sufficiently new that there wasn't five year data. We then created a score which was the summation of the five year number multiplied by three, the three year number multiplied by 1.5 and the one year number.

     

     

    Name

    5 year AR (%)

    3 year AR (%)

    1 year AR (%)

    ETF Score

    Mu Fund Score

    DBC

    PowerShares DB Commodity Index Tracking

    5.97

    (4.76)

    20.50

    31%

     

    PCRIX

    PIMCO Commodity Real Ret Strat Instl

    2.32

    (8.45)

    20.85

     

    15%

    EWX

    SPDR S&P Emerging Markets Small Cap

    8.69

    (0.04)

    18.93

    45%

     

    NEWFX

    American Funds New World A

    8.29

    (0.21)

    17.00

     

    42%

    ODVYX

    Oppenheimer Developing Markets Y

    (2.86)

    (7.95)

    25.22

     

    5%

    VWO

    Vanguard Emerging Markets Stock ETF

     

     

    17.45

    17%

     

    JNK

    SPDR Barclays Capital High Yield Bond

    4.15

    6.89

    11.89

    35%

     

    PHIYX

    PIMCO High Yield Instl

    5.51

    6.10

    7.11

     

    33%

    PRRIX

    PIMCO Real Return Instl

    5.40

    4.34

    5.44

     

    28%

    TIP

    iShares Barclays TIPS Bond

    4.10

    2.46

    4.06

    20%

     

    AGG

    iShares Barclays Aggregate Bond

    5.28

    5.05

    3.76

    27%

     

    PTTRX

    PIMCO Total Return Instl

    8.07

    8.64

    6.61

     

    44%

    GVI

    iShares Barclays Interm Govt/Credit Bond

     

    3.12

    2.53

    7%

     

    LSBDX

    Loomis Sayles Bond Instl

    6.35

    4.82

    8.32

     

    35%

    PRWBX

    STABLEVALUE

    3.96

    3.07

    (0.21)

     

    16%

    SHY

    iShares Barclays 1-3 Year Treasury Bond

    3.65

    1.99

    1.07

    15%

     

    BSV

    Vanguard Short-Term Bond ETF

     

    1.08

    0.90

    3%

     

    VBISX

    Vanguard Short-Term Bond Index Inv

    4.36

    2.87

    0.10

     

    17%

    VEA

    Vanguard Europe Pacific ETF

     

    (2.68)

    17.45

    13%

     

    VWILX

    Vanguard International Growth Adm

    4.04

    (1.26)

    21.65

     

    32%

    EFV

    iShares MSCI EAFE Value Index

    (0.66)

    (4.69)

    12.77

    4%

     

    TBGVX

    TweedyBrowne Global Value

    2.87

    1.38

    13.75

     

    24%

    REFDX

    Morgan Stanley Real Estate I

    2.55

    2.13

    34.01

     

    45%

    VNQ

    Vanguard REIT Index ETF

    2.09

    2.26

    33.32

    43%

     

    FSLBX

    Fidelity Select Brokerage & Invmt Mgmt

    (1.09)

    (1.28)

    15.23

    10%

     

    XLF

    Financial Select Sector SPDR

    (10.63)

    (12.91)

    15.61

     

    -36%

    IWV

    iShares Russell 3000 Index

    1.91

    1.28

    21.97

    30%

     

    OAKMX

    Oakmark I

    4.75

    5.85

    17.86

     

    41%

    SLASX

    Selected American Shares S

    1.35

    (1.68)

    15.91

     

    17%

    VIG

    Vanguard Dividend Appreciation ETF

     

    3.37

    18.54

    24%

     

    VINIX

    Vanguard Institutional Index Instl

    2.11

    0.16

    19.63

     

    26%

    VTI

    Vanguard Total Stock Market ETF

    2.57

    1.55

    23.38

    33%

     

    CISIX

    Calvert Social Index I

    1.71

    1.66

    23.25

     

    31%

    HACAX

    Harbor Capital Appreciation Instl

    3.15

    4.35

    20.33

     

    36%

    MGK

    Vanguard Mega Cap 300 Gr Index ETF

     

    3.25

    23.65

    29%

     

    VUG

    Vanguard Growth ETF

    3.25

    2.33

    22.48

    36%

     

    RWMFX

    American Funds Washington Mutual R5

    1.68

    (1.10)

    16.74

     

    20%

    VTV

    Vanguard Value ETF

    2.03

    (0.60)

    19.16

    24%

     

    BRWIX

    Brandywine

    1.16

    (3.55)

    36.42

     

    35%

    IWP

    iShares Russell Midcap Growth Index

    4.55

    5.27

    38.04

    60%

     

    POAGX

    PRIMECAP Odyssey Aggressive Growth

    6.64

    9.56

    18.72

     

    53%

    VOT

    Vanguard Mid-Cap Growth ETF

     

    3.45

    36.71

    42%

     

    VASVX

    Vanguard Selected Value Inv

    4.65

    4.17

    23.07

     

    43%

    VOE

    Vanguard Mid-Cap Value ETF

     

    3.77

    23.68

    29%

     

    AOM

    iShares S&P Moderate Allocation

     

     

    9.73

    10%

     

    VGSTX

    Vanguard STAR Inv

    3.61

    2.57

    12.85

     

    28%

    OTCFX

    T. Rowe Price Small-Cap Stock

    5.52

    10.67

    38.04

     

    71%

    VB

    Vanguard Small Cap ETF

    4.14

    6.49

    31.92

    54%

     

    PSVIX

    Allianz NFJ Small Cap Value Instl

    6.67

    5.67

    28.03

     

    57%

    VBR

    Vanguard Small Cap Value ETF

    2.50

    4.42

    25.69

    40%

     

     

     

    Instead of looking at each fund individually, we added the scores in each of the major asset classes together:

     

    Asset Class

    ETF Score

    Mutual Fund Score

    MF/ETF

    Delta

    US Equities

    4.20

    4.22

    0%

    International Equities

    0.17

    0.56

    228%

    Emerging Markets

    0.62

    0.46

    -26%

    Real Estate

    0.43

    0.45

    4%

    Commodities

    0.31

    0.15

    -52%

    Fixed Income

    1.07

    1.73

    62%

    This gives us some insight on the different portfolios.

    • US equity returns are running neck and neck - indicating that to improve the returns of the ETF portfolio, looking at the US equities should only be undertaken when the other asset classes have been examined
    • There is a significant gap in the international equities. The Vanguard Europe Pacific ETF looks like it will help but this is an area for shoring up the ETF portfolio
    • The Emerging Market ETF outperforms the original so, while it may be better to improve performance, that is a secondary task
    • Real estate runs neck and neck so look at that later
    • Commodities, the ETFs are running ahead so, again, we can look at that later
    • Fixed income is probably the biggest area where the difference is explained. It is the largest single asset category in terms of funds invested (in most cases) and there is a significant difference between the two. The original plan has two of the leading managed fixed income funds which shows consistently higher performance.

    The takeaway is that to look to improve returns from the Clone ETF, focus needs to be applied on international and fixed income asset classes.

    As we go through this exercise, this will bring to the fore a elephant in the ETF space - are there times when managed funds do outperform indexed funds - intuitively it would seem so and fixed income in this market seems to suggest itself as a prime example.

    We will examine this deeper in an upcoming article

    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.

    Symbols:DBC,PCRIX,EWX,NEWFX,ODVYX,VWO,JNK,PHIYX,PRRIX,TIP,AGG,PTTRX,GVI,LSBDX,PRWBX,SHY,BSV,VBISX,VEA,VWILX,EFV,TBGVX,REFDX,VNQ,FSLBX,XLF,IWV,OAKMX,SLASX,VIG,VINIX,VTI,CISIX,HACAX,MGK,VUG,RWMFX,VTV,BRWIX,IWP,POAGX,VOT,VASVX,VOE,AOM,VGSTX,OTCFX,VB,PSVIX,VBR,

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