Fedex and UPS 401Ks Shine Light on the Pros and Cons of Asset Class Diversification

01/15/2011 Share 0 comments

JPMorgan Chase (NYSE: JPM) is one of the oldest financial institutions in the United States. With a history dating back over 200 years.

 The company claims:

• Leadership in global financial services with assets of $2 trillion.
• Operation in more than 60 countries.
• More than 200,000 employees.
• A leader in investment banking, financial services
• Their stock is a component of the Dow Jones Industrial Average

2010 Review

2010 was a good year for equities -- especially in the US and 2011 starts with risk chasing evident. Despite this, we may see subdued market: stocks are not cheap. Investors should keep a cool head and manage their portfolios systematically. Plans with access to emerging markets, real estate and commodities are likely to benefit along with the assumed staple of US equities. Plans will also want to have an array of bond choices as the current market conditions challenge established assumptions as to what is safe.

Their 401K plan consists of 14 funds. These funds enable participants to gain exposure to 3 major assets: US Equity, Foreign Equity, Fixed Income.

The list of minor asset classes covered: 
Foreign Large Blend: EFA, VEU, GWL, PFA 
Intermediate Government: IEI, VGIT, ITE 
Intermediate-term Bond: AGG, CIU, BIV, BND 
Large Blend: IVV, IYY, IWV, VTI, VV, SPY, DLN, RSP, SCHX 
Large Growth: IVW, IWZ, JKE, VUG, ELG, QQQQ, RPG, SCHG 
Large Value: IVE, IWW, JKF, VTV, ELV, PWV, RPV, SCHV 
Mid-cap Growth: IJK, IWP, VOT, EMG, PWJ, RFG, UKW 
Small Blend: IJR, IWM, JKJ, VB, DSC, PJM, DES, SAA, UWM, SCHA 
Us Equity: IVV, IYY, IWV, VTI, VV, SPY, DLN, RSP, SCHX

 

Asset Class	Number of funds
REITs	0
Balanced Fund	0
Fixed Income	3
Commodity	0
Sector Fund	0
Foreign Equity	1
Emerging Market Equity	0
US Equity	9
Other	1
Total	14

This is an old style plan with diversification in US equities but scant choices elsewhere. While the US economy is doing well, this plan will likely flourish but will suffer in turbulent times.

As of Jan 13, 2011, this plan 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:

Diversification -- Rated as poor (7%) 
Fund Quality -- Rated as average (56%) 
Portfolio Building -- Rated as below average (24%) 
Overall Rating: below average (28%)

The company has the ability to select good funds as they are in the business but they would score much more highly with a better distribution in other asset classes.

 

Portfolio Analysis

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 3 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 
Fixed Income: AGG or BND 
Performance chart (as of Jan 13, 2011)

Performance table (as of Jan 13, 2011)

Portfolio Name	1Yr AR	1Yr Sharpe	3Yr AR	3Yr Sharpe	5Yr AR	5Yr Sharpe
The J.P. Morgan Chase 401k Savings Plan Tactical Asset Allocation Moderate	4%	36%	6%	68%	8%	66%
The J.P. Morgan Chase 401k Savings Plan Strategic Asset Allocation Moderate	7%	48%	0%	-0%	4%	14%
Three Core Asset ETF Index Funds Tactical Asset Allocation Moderate	-2%	-21%	2%	22%	4%	33%
Three Core Asset ETF Index Funds Strategic Asset Allocation Moderate	11%	75%	2%	9%	4%	16%

Currently US Equity, Commodities and Real Estate are doing well. Only US Equity is available to The J.P. Morgan Chase 401k Savings Plan participants.

This plan beats the three asset benchmark by virtue of the US asset class choices. If would be a stronger plan with more fixed income  and international equity choices and an additional asset class.

As a leader in the financial market, it is surprising that their 401K plan is so mediocre. The J.P. Morgan Chase 401k Savings Plan would do well by their employees to consider reviewing their existing funds and adding an additional asset class. 

Being in the top echelon of the worlds companies and in finance, we would have hoped for a better retirement offering. That would be strengthening the bond choices and providing more choices in more asset classes including emerging markets, real estate and commodities.

 

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