04/19/2011

The combination of a robust U.S. equity market and the proliferation of company-sponsored retirement plans helped push total assets in 401(k) pans over the $3 trillion threshold at close of last year, up 13% from 2009. The incidents in Japan, the Middle East and even as far back as New Orleans teach us the danger of living on borrowed time, the reactors, the governments the levees keeping things going -- just one more year. The temptation to delay until next time is very seductive until disaster strikes and the cost to repair, dwarfs the cost to prevent. Many working people put off their retirement investing -- just one more year until it becomes a "hair on fire" problem -- which it now is for baby boomers for whom retirement is a near and present danger.

The starting point for any retirement investing is the company provided retirement plan. Not all plans are created equal. Not all plans have the same number of choices, asset classes, quality of funds and, most importantly, risk adjusted returns.

Fedex has more funds but have one less asset class -- UPS has REITs and Fedex does not. Neither company provides Emerging Markets or Commodity funds.

Both companies have a wide choice of Target Date funds which may appeal to some but are expensive and have mixed reviews as to their value for money.

It is interesting that UPS has emerging market bonds but no emerging ma
There are easy ways to improve these plans with emerging market and commodity exposure.

As of Apr 18, 2011, UPS Savings Plan investment choice is rated as average and Federal Express (FedEx) 401K Plan for Pilots investment choice is rated as below average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are . It has the following detailed ratings:

Performance chart (as of Apr 18, 2011)

Performance table (as of Apr 18, 2011)

Currently Commodities, Real Estate and US Equity are doing well. US Equity and Real Estate available to UPS Savings Plan participants Only US Equities are available to FedEx participants.

When we add the six asset class SIB benchmark to the table, it is possible to see how the two compare against a reference.

Takeaways

• The UPS plan with its extra asset class has a three point lead over the FedEx plan when comparing tactical asset allocation
• The Six asset class benchmark has a three point lead over the UPS plan when comparing tactical asset allocation
• The FedEx plan without the recent burden of the Real Estate crash beats UPS when comparing strategic asset allocation
• The Six asset class benchmark beats the FedEx plan over five years where emerging markets and commodities offset the drag of real estatewhen comparing strategic asset allocation

With either plan, augmenting a retirement portfolio with emerging market equities and commodities will provide better diversification and likely higher risk adjusted returns. As inflation seems like a near certainty, commodity exposure becomes increasingly important.

Disclosure:

MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Symbols: UPS, FDX, BAEDX, EFA, BPRAX, SSINX, SBMRX, SVSPX, MDY, VGSIX, VTINX, IWM, VGTSX, VTRIX, VIPSX, VBTIX, VIFSX, VWNDX, VEMSX, VMISX, VWELX, VSMGX, VTINX, VSISX, AGG, BND, VTI, VNQ, IYR, DBC, VWO, EEM, EFA

Exchange Tickers: (UPS), (FDX), (BAEDX), (EFA), (BPRAX ), (SSINX), (SBMRX), (SVSPX), (MDY), (VGSIX), (VTINX), (IWM), (VGTSX), (VTRIX), (VIPSX), (VBTIX), (VIFSX), (VWNDX), (VEMSX), (VMISX), (VWELX), (VSMGX), (VTINX), (VSISX), (AGG), (BND), (VTI), (VNQ), (IYR), (DBC), (VWO), (EEM), (EFA)

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07/09/2010

Portfolio construction consists of the following steps

• Decide personal risk profile which determines the target allocation in risk assets.
• Decide asset allocation method: strategic or tactical or both (strategic does not change target asset allocations while tactical can alter allocations more actively)
• Decide target allocation for each asset in a strategic asset allocation
• Periodically rebalancing portfolios

For a portfolio using strategic asset allocation, with long term target allocation being fixed (and only changed when major events such as approaching to retirement and children college education spending, for example), one can further enhance a portfolio return and reduce the risk by rebalancing and fund selection in an asset class. It is reported that adopting proper timing and way to rebalance a portfolio can improve return and reduce risk (see Daryanani opportunitstic rebalancing article).  In this article, we focus on fund selection.

In a well designed portfolio for retirement plans (401K or IRA), it is a popular practice to have funds with various style exposures. In a stock/equity asset, a fund style is defined as value style (growth/blend/value) and size style (large/mid/small cap). The Morningstar 9 boxes of styles are essentially the combinations of the 3 value and 3 size styles. In a fixed income asset, a fund style is a combination of credit risk (junk/investment grade) and interest rate risk (short/intermediate/long) for corporate bonds or a just interest rate risk for treasury bonds.  In an actively managed portfolio, it is a well recognized and widely practiced method to select funds based on style rotation to improve a portfolio alpha or return. For example, in an article published in Journal of Asset Management (May, 2007), B. Arshanapalli , L. Switzer and K. Panju concluded that active multi-style rotation strategies can be devised to outperform the best performing buy-and-hold portfolio.

MyPlanIQ maintains an index fund based plan or an ETF based plan using candidate funds based on those in a lazy portfolio proposed by Fund Advice Paul Merriman and maintained by MarketWatch.com (called Fund Advice Ultimate Buy and Hold Portfolio) (see here for the independently tracked portfolio on MyPlanIQ.com). The candidate funds and the original allocation are as follows

The funds cover five asset classes: U.S. Equity, International Equity, Emerging Mkt Equity, U.S. REIT and Fixed Income. They have various style exposures for U.S. stock market (equity), International Stocks and Fixed income.

MyPlanIQ Strategic Asset Allocation (SAA) selects funds with the best risk adjusted returns for each asset class when rebalancing.  The following table compares the Strategic Asset Allocation (SAA) moderate portfolios in both index fund and ETF plans as well as the original portfolio (both MyPlanIQ SAA moderate portfolios have 40% allocation in fixed income). We also include the strategic asset allocation moderate portfolio in MyPlanIQ Five Core Asset ETF Plan that consists one fund for each asset class.

As of 7/2/2010

From the above table, we can observe:

• Diversification over styles improves return (FundAdvice Buy and Hold vs. Five Core SAA Moderate).

• Style rotation adds 1.3-1.7% returns over buy and hold (SAA Moderate ETF or Index Funds vs. FundAdvice Buy and Hold).

The above observations are consistent across thousands of plans MyPlanIQ maintains. We should also point out that better fund/style selection does not alter the overall portfolio risk allocation, which is a major advantage over an actively managed tactical asset allocation portfolio.

At the moment, for U.S. stocks, MyPlanIQ SAA favors small cap (IWM), small cap value (IWN). For fixed income, it favors Inflation-protected treasury (TIP).

labels:investments,IRA,401K,

Symbols:vti,spy,veu,efa,vwo,eem,iyr,icf,vnq,dbc,gsg,bnd,agg,tlt,lqd,tip,iwb,oef,iwd,iwo,iwm,ijr,iwn,iwp,iwr,ijh,iws,dvy,iwc,efv,iww,iwv,iwz,VFITX,VFISX,VTRIX,VDMIX,VIPSX,NAESX,VISVX,VIVAX,VFINX,VEIEX,VGSIX,

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