Shell Versus Morningstar -- More is Better

02/27/2011 0 comments

We recognize that technology continually changes the world charging into every aspect of our lives. Investing has also been significantly changed with instant access to news and the lead measured in milliseconds. Significant swings of the market can be impacted by the touch of a button.

For the longterm or retirement investor, the impact is more muted but still present and with the emergence of new investing apps, perhaps a larger change is occurring. Historically, plans for the long term investor have been limited to a relatively few funds, hopefully well chosen to give an easily comprehensable set of choices that still enable the creation of a strong portfolio to deliver good returns.

We have already reported on what we think is one of the best --Morningstar's 401K plan has only 26 funds that give access to six major assst classes. Based on MyPlanIQ's Plan Rating methodologythey achieve top ratings. This is about as good as it gets -- good diversification, great choice of funds, ability to create a non correlated portfolio and strong historical returns.

However, if we have access to applications that will automatically sift and sort a large number of funds, do we need to limit the number of funds in a plan?

To contrast this, we also reviewed a Shell 401k Plan which offers an extraordinary number of funds -- which we compare with the Morningstar alternatives.

Asset Class

Shell

Morningstar

Balanced Fund 28 1
REITs 3 1
Fixed Income 43 6
Commodity 0 1
Sector Fund 40 1
Foreign Equity 31 2
Emerging Market Equity 8 2
US Equity 143 11
Other 7 1
Total 303 26

Without a technological solution, the number of funds in the Shell plan is overwhelming, but if there is an application to sort and select, more funds can actually be better.

We can compare the rating of both plans.

AttributeShellMorningstar
Diversification Great (98%) Great (96%)
Fund Quality Average (37%) Average (72%)
Portfolio Building Great (88%) Great (96%)
Overall Rating Above Average (76%) Above Average (89%)

The Shell plan wins in diversification by having excellent coverage of the five main asset classes and some of the sub-classes which contribute to better returns. Morningstar is close behind with one more major asset class but less coverage of the secondary styles.

Morningstar funds are higher quality making it easier to select a strong portfolio which makes it easier to build a portfolio and hence Morningstar comes out on top in the ratings.

If we now compare historical results of the two plans:


Performance table (as of Feb 23, 2011)

Portfolio Name1Yr AR1Yr Sharpe3Yr AR3Yr Sharpe5Yr AR5Yr Sharpe
Royal Dutch Shell Tier III 401K Tactical Asset Allocation Moderate 9% 110% 11% 108% 14% 111%
Royal Dutch Shell Tier III 401K Strategic Asset Allocation Moderate 13% 183% 2% 15% 5% 29%
Morningstar Inc 401K Plan Tactical Asset Allocation Moderate 21% 170% 13% 125% 14% 127%
Morningstar Inc 401K Plan Strategic Asset Allocation Moderate 14% 179% 3% 25% 5% 36%

We see that in the five year time horizon, the performance of the plans are nearly identical -- note that the Sharpe index is higher for the Morningstar plan.

This nicely contrasts the brute force and elegant approach to retirement fund planning.

What we see going forward are more and more ETF plans with many alternatives in them (Vanguard has 64, TD Ameritrade has 101) that offer more of the brute force alternatives.

With investing apps to sort and rank the choices, this should enable investors to leverage these plans to get good returns at a low cost.

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.

 

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