Kellogg Old Style 401K -- Good Funds -- Not Enough Diversity
04/22/2011 0 comments
Spring is here and summer isn't far away -- where does the time go? Already this year we have seen uprisings, natural and man made disasters, Tax season has come and gone and the Royal Wedding is everywhere and will soon be gone. How many of our New Year's resolutions are still intact? The tyranny of the urgent may tempt us to delay 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 has becomes a "hair on fire" problem.
The problem is that we can easily be overwhelmed and shut down. The way to solve this is to focus on what works in the long term -- that is what long term investing is all about -- and allow that to filter out what may work in the short term but won't stand the test of time.
We continue to examine different portfolios to see what we can learn and use to further our investment portfolios. Today we look at the retirement plan from the venerable Kellogg company.
Kellogg 401k Plan's 401K plan consists of 9 funds. These funds enable participants to gain exposure to 3 major assets: US Equity, Foreign Equity, Fixed Income.
We contrast this with our Six Core Asset ETF Benchmark's benchmark plan which consists of 6 funds. These funds enable participants to gain exposure to 6 major assets: US Equity, Commodity, Foreign Equity, REITs, Emerging Market Equity, Fixed Income.
The list of minor asset classes covered by Kellogg 401k Plan | The list of minor asset classes covered by Six Core Asset ETF Benchmark |
---|---|
Equity: K Foreign Large Blend: RERFX Intermediate-term Bond: PTTRX Large Blend: SVSPX Large Growth: PRGFX Large Value: VWNAX Small Growth: VEXRX Small Value: DFSVX Other: CASH |
Commodities Broad Basket: DBC Diversified Emerging Mkts: VWO Foreign Large Blend: VEU Intermediate-term Bond: BND Large Blend: VTI Real Estate: VNQ |
Asset Class | Kellogg 401k Plan | Six Core Asset ETF Benchmark |
---|---|---|
REITs | 0 | 1 |
Fixed Income | 1 | 1 |
Commodity | 0 | 1 |
Sector Fund | 0 | 0 |
Foreign Equity | 1 | 1 |
Emerging Market Equity | 0 | 1 |
US Equity | 6 | 1 |
Other | 1 | 0 |
Total | 9 | 6 |
As of Apr 21, 2011, Kellogg 401k Plan investment choice is rated as average and Six Core Asset ETF Benchmark investment choice is rated as 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:
Attribute | Kellogg 401k Plan | Six Core Asset ETF Benchmark |
---|---|---|
Diversification | below average (13%) | average (62%) |
Fund Quality | great (99%) | average (53%) |
Portfolio Building | below average (16%) | above average (72%) |
Overall Rating | average (40%) | average (63%) |
Both plans are simple -- having between six and nine funds. The lack of funds in the benchmark plan will be compensated by its breadth of diversification. We would expect the Kellogg plan to do well when US and international equities are doing well as they have great funds. However, when help is needed from other asset classes -- commodities and real estate for an example, the benchmark plan should win out.
The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA , both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical 6 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:
Performance charts (as of Apr 21, 2011)
Three Month Chart
Over three months, the plans are running neck and neck. The richness of the US equity choices in the Kellogg plan offsets the lack of commodity, real estate and emerging market equities that are shoring up the weakness in international equities.
One Year Chart
Over a year's period, we see that the Kellogg TAA plan is struggling -- all three asset class TAA plans have struggled over the last year as there hasn't been a strong trend. The six asset class benchmark is the leader with strong contributions from many of the asset classes.
Three Year Chart
Five Year Chart
Over the longer period, it's possible to see where the broader asset class exposure in Real Estate, Emerging markets and commodities can bring more to the table and help improve returns.
Performance table (as of Apr 21, 2011)
Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
---|---|---|---|---|---|---|
Kellogg 401k Plan Tactical Asset Allocation Moderate | -1% | -8% | 5% | 54% | 6% | 57% |
Kellogg 401k Plan Strategic Asset Allocation Moderate | 12% | 92% | 5% | 29% | 6% | 36% |
Six Core Asset ETF Benchmark Tactical Asset Allocation Moderate | 11% | 82% | 9% | 76% | 13% | 87% |
Six Core Asset ETF Benchmark Strategic Asset Allocation Moderate | 15% | 121% | 4% | 20% | 7% | 34% |
Currently Commodities, Emerging Market and Real Estate are doing well. But these asset classes are not available to Kellogg 401k Plan participants. Fortunately, US equities are also doing well and that is what brings reasonably strong returns to the portfolio in the short term.
To summarize, Kellogg 401k Plan plan participants can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles. Currently, the tactical asset allocation strategy indicates overweighing on US Equity and Foreign Equity funds. 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: DBC, VWO, VEU, BND, VTI, VNQ, K
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