JPMorgan Chase -- Top Tier Company -- Second Tier Retirement Plan

01/15/2011 Share 0 comments

We have examined the retirement plans of two of the major players in shipping and logistics. UPS  has a four asset class plan and Fedex has a three asset class plan.

We now compare them side by side and see how the different attributes of the plans lead to different results.

The funds line up

Asset Class	UPS	Fedex
Balanced Fund	10	14
REITs	1
Fixed Income	4	2
Commodity	0
Sector Fund	0
Foreign Equity	1	2
Emerging Market Equity	0
US Equity	3	5
Other	3
Total	22	23

Both companies offer a large number of balanced funds that include target date funds. UPS has a better selection of fixed income but FEDEX has more choices in international and US Equities.

In general, both would do better to have more choices in each of their funds. One choice in REIT and foreign equity for UPS is low.

Rating Attribute	UPS	Fedex
Diversification	84%	15%
Fund Quality	24%	43%
Portfolio Building	73%	40%
Overall Rating	62%	33%

 
We note that UPS gets much higher marks for having the extra asset class. UPS has an emerging market bond fund which provides additional exposure in bonds which further boosts its rating. Fedex does not score highly.

Fedex does beat out UPs in fund quality but with a better choice of funds, UPS gives a better portfolio mix.

The result is that the UPS plan scores more highly than the FEDEX plan.

We now line up returns performance for the last five years and see how this plays out.

Performance chart (as of Jan 11, 2011)

Performance table (as of Jan 11, 2011)

Portfolio Name	1Yr AR	1Yr Sharpe	3Yr AR	3Yr Sharpe	5Yr AR	5Yr Sharpe
UPS Savings Plan Tactical Asset Allocation Moderate	15%	105%	9%	93%	10%	91%
UPS Savings Plan Strategic Asset Allocation Moderate	8%	64%	1%	5%	3%	7%
Federal Express (FedEx) 401K Plan for Pilots Tactical Asset Allocation Moderate	6%	51%	6%	68%	7%	65%
Federal Express (FedEx) 401K Plan for Pilots Strategic Asset Allocation Moderate	9%	91%	4%	25%	5%	36%

Currently US Equity, Commodities and Real Estate are doing well. US Equity and Real Estate available to UPS Savings Plan participants whereas only US Equity is available to the Fedex participants,

We note the behavior of the FEDEX plan is consistent with the majority of plans we have analyzed: The one year returns for SAA beat out the TAA performance. The strong US and other equity markets created a bull market and SAA will usually outperform in those circumstances. Over the longer term where there are a mix of favorable and unfavorable conditions, TAA limits losses which compensates for the reduced upside.

The UPS plan, with its larger number of asset classes should, in theory, give better returns -- which it does in TAA but not in SAA and this is worth some explanation.

For the one year returns

• The tactical asset allocation was able to provide better returns by virtue of having a range of bond and balanced funds which provided some upside to the rather dismal bond behavior
• TAA was able to take advantage of moving in and out of US equities when they fell back in the middle of the year
• TAA didn't have positions in international equity until late in the year
• The SAA had to take the US and international equities hit and had nothing to offset the gain
• Real estate was a constant factor for both 

When we look over the longer term horizon, we note that while the four asset TAA strategy is at the top, the four asset class SAA comes below the three asset class SAA.

The reason for this is that the real estate asset class was hammered over the last five years and has significantly hampered performance. The TAA strategy avoided much of the loss by moving out of equities all together.

The Fedex plan, while suffering the drop in US and international equities, did not have the real estate asset class and so was hit slightly less.

In the longer term, as real estate continues to recover and uncorrelated asset classes return to more normal behavior, we expect the standard patter to re-emerge. However, it is caveat emptor -- let the buyer be informed!


Takeaway

• 2007 to date has given us unprecedented financial markets that have challenged conventional wisdom and stressed assumptions for investment plans
• There are special cases where strategies perform in a counter-intuitive manner
• It's critical not to be caught up in the  exuberance of the last year and especially the last quarter and forget the gut wrenching days that so quickly fade
• It is critical to understand your asset class choices and the risk and reward they offer.

labels; investment
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