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FFTWX: Want To Retire In 2025? Build A More Efficient Portfolio

Summary FFTWX offers investors a high expense ratio to go with a needlessly complex portfolio. By incorporating an enormous volume of other mutual funds the target date fund incorporates a higher expense ratio. If the fund needs exposure to the total U.S. market, they can ditch the complicated combination of funds and just use FSTVX. Lately I have been doing some research on target date retirement funds. Despite the concept of a target date retirement fund being fairly simple, the investment options appear to vary quite dramatically in quality. Some of the funds have dramatically more complex holdings consisting with a high volume of various funds while others use only a few funds and yet achieve excellent diversification. My goal is help investors recognize which funds are the most useful tools for planning for retirement. In this article I’m focusing on the Fidelity Freedom® 2025 Fund (MUTF: FFTWX ). What do funds like FFTWX do? They establish a portfolio based on a hypothetical start to retirement period. The portfolios are generally going to be designed under Modern Portfolio Theory so the goal is to maximize the expected return relative to the amount of risk the portfolio takes on. As investors are approaching retirement it is assumed that their risk tolerance will be decreasing and thus the holdings of the fund should become more conservative over time. That won’t be the case for every investor, but it is a reasonable starting place for creating a retirement option when each investor cannot be surveyed about their own unique risk tolerances. Therefore, the holdings of FFTWX should be more aggressive now than they would be 3 years from now, but at all points we would expect the fund to be more conservative than a fund designed for investors that are expected to retire 5 years later. What Must Investors Know? The most important things to know about the funds are the expenses and either the individual holdings or the volatility of the portfolio as a whole. Regardless of the planned retirement date, high expense ratios are a problem. Depending on the individual, they may wish to modify their portfolio to be more or less aggressive than the holdings of FFTWX. Expense Ratio The expense ratio of Fidelity Freedom® 2025 is .70%. That expense ratio is simply too high. Investors using a target date fund need to keep an eye on those expenses. It is possible to create a very efficient portfolio using only a few funds. Ideally the funds selected for building the portfolio would be selected for offering excellent diversified exposure at very low expense ratios. At the most simplistic level, an investor is looking for domestic equity, international equity, domestic bonds, and international bonds. If any of those had to be left out, the international bond allocation is the least important. In my opinion, there is no need to use both growth and value indexes. There is no need to individually use large, medium, and small-cap allocations. For instance, the Fidelity Spartan® Total Market Index Fund (MUTF: FSTVX ) has a net expense ratio of .05% and offers exposure to the vast majority of the U.S. market. If you were building a target date fund from Fidelity funds, you could simply use FSTVX and eliminate all other domestic equity funds. This method would provide investors with a low expense ratio on the underlying domestic equity position and excellent diversification. That is precisely why I am including FSTVX as a holding in my portfolio. The Vanguard Target Retirement 2025 fund has an expense ratio of .17%. Just so investors have a healthy comparison of how much it costs to run a very efficient target retirement fund, the Vanguard expense ratio gives a pretty clear indication. Holdings / Composition The following chart demonstrates the holdings of Fidelity Freedom® 2025: If you were making a target date fund, how many allocations would you need? Hopefully it wouldn’t be that many. Note that the holdings chart above simply showed the equity funds. There is another long list of funds for bond exposures. There is simply no need for a portfolio to be this complex. Volatility An investor may choose to use FFTWX in an employer sponsored account (if their employer has it on the approved list) while creating their own portfolio in separate accounts. Since I can’t predict what investors will choose to combine with the fund, I analyze it as being an entire portfolio. (click to enlarge) When we look at the volatility on FFTWX, it is dramatically lower than the volatility on the SPDR S&P 500 Trust ETF ( SPY). That shouldn’t be surprising since the portfolio has some large bond positions. Over the last five years it has significantly underperformed SPY, but that should be expected given the much lower beta and volatility of the fund. Investors should expect this fund to retain dramatically more value in a bear market and to fall behind in a prolonged bull market. Even adjusted for the beta, the returns on this portfolio were pretty weak. They were slightly over half the rate achieved by SPY. For comparison, one way an investor can achieve precisely half of the returns on SPY with precisely half the volatility is to buy SPY with half of their portfolio and leave the rest sitting in the account. That would have resulted in slightly lower returns, but it would also have resulted in a dramatically reduced max drawdown. For a fund designed for people that are retiring only a decade from now, having had a max drawdown that was almost as large as if the entire portfolio had been invested in SPY is a pretty poor performance. Opinions The first change I would want to make here is to see a lower expense ratio and a dramatically simplified portfolio of holdings. There is no need for a large complicated portfolio. To drive annualized volatility down while using Fidelity funds, I would favor using the Spartan ® Long-Term Treasury Bond Index Fund (MUTF: FLBAX ). The fund has a very high weighted average maturity (around 25 years), over 99% of the portfolio is in treasury securities (low credit risk), and an expense ratio of only .1%. That is a good solid mutual fund and using it in a target date portfolio fund with regular rebalancing allows investors to automatically take advantage of the negative correlation that long term treasuries have with the domestic equity market. Comparison Portfolio I used Invest Spy to put together a portfolio from Fidelity funds that I believe is dramatically superior to FFTWX. That portfolio is demonstrated below: (click to enlarge) This portfolio simply combines their total domestic market index (expense ratio .05%) with their long term treasury ETF (expense ratio .1%). The resulting expense ratio of the two underlying funds at a 50/50 weighting should be about .075%. This hypothetical portfolio had a max drawdown of only 7.3% and an annualized volatility of 7.2%, which is dramatically lower than the 10.4% reported for FFTWX. Of course, investors should not rely on historical results as predicting future results. The example is simply to demonstrate that a portfolio of domestic equities and long term treasuries has been capable of maintaining fairly low portfolio volatility due to the historical negative correlation of the two asset classes. Conclusion When an investor takes on an expense ratio that is even .3% higher and pays that ratio for 20 years, they are looking at losing 6% of the value of the portfolio without accounting for compounding. If investors account for the benefits of compounding and assume annual returns are positive, the potential value lost is even greater than 6%. FFTWX is an expensive option for investors looking for a simple “set it and forget it” retirement plan from their employer sponsored retirement accounts. The volatility of the fund is not a problem and the total exposures are not unreasonable. The problem comes down to two issues. One is that the fund has needlessly complicated the portfolio holdings and the other is that the expense ratio is simply too high when compared to similar products offered by competitors. There are some great funds offered by Fidelity and I have positions in a few of them. Unfortunately, this fund just falls short of the mark.

Catalyst And 361 Capital Soft Closing Futures Funds

By DailyAlts Staff Mutual funds are closed for a variety of reasons, but the most common is probably a lack of sufficient investor interest, normally as the result of poor performance. On the opposite end of the spectrum, funds that become too popular and command too much investor interest must close themselves to new investors to avoid exceeding the maximum capacity of their strategies. This latter type of fund closing is known as a “soft closing,” and two alternative funds – the Catalyst Hedged Futures Strategy Fund (MUTF: HFXAX ) and the 361 Managed Futures Strategy Fund (MUTF: AMFZX ) – recently joined the ranks of funds that have gotten too popular to continue taking investors’ money. Catalyst Hedged Futures Strategy Fund The $1.6 billion Catalyst Hedge Futures Strategy Fund debuted as a private fund way back in 2005 and was subsequently converted to a mutual fund by Catalyst in August 2013. As of August 31, the fund’s year-to-date returns of 7.61% ranked in the top 10% of funds in the Morningstar Managed Futures category, and the fund has shone particularly bright over the past six months, generating gains while most of its peers were in the red. Undoubtedly, this stellar performance contributed to increased interest in the fund, which Catalyst says is “rapidly approaching capacity.” As a result, the Catalyst Hedged Futures Fund will be closed to new investors starting October 31, 2015. Closing the fund will help Catalyst “maintain the integrity of the strategy” and not sacrifice performance, according to a statement. The fund’s existing shareholders – and possibly advisors – will be “grandfathered in” and allowed to add more money to the fund, while prospective new shareholders will have to wait for a “Part 2” version of the fund, set to be ready “in the coming weeks.” The “Part 2” fund will pursue a very similar strategy to the original fund, which distinguished itself from other managed futures funds by being 100% options-based. The new fund will be of interest to investors concerned about a repeat of the 2008 financial crisis, as the original Catalyst Hedged Futures Fund gained nearly 50% during that period, thanks to its virtually nonexistent correlation to stocks and bonds. For more information, visit catalystmutualfunds.com . 361 Managed Futures Strategy Fund Investors interested in gaining exposure to managed futures via the 361 Managed Futures Strategy Fund , which returned 7.87% in the first eight months of 2015 and ranked in the top 8% of funds in its Morningstar category, have until September 30 to jump on board – after that date, the fund will cease taking money from new investors. “Since our founding in 2001, we’ve endeavored to be excellent stewards of our clients’ capital,” said 361 Captial CEO Tom Florence, in a recent announcement. “With that in mind, we’ve put forth great effort into measuring the capacity of our strategies, in order to ensure that asset growth doesn’t degrade return potential.” Like the Catalyst Hedged Futures Strategy Fund, the 361 Managed Futures Strategy Fund will remain open to existing investors. The fund had just over $1 billion in assets under management as of September 8, and the 361 investment team feels that a “soft close” allows capacity for existing clients, but keeping the fund open for new investors would risk hampering performance. One of the features that makes the 361 Managed Futures Strategy Fund so attractive is the low correlation it has exhibited to major asset classes. According to 361 Capital, the fund has had negative correlations to foreign (-0.07) and domestic equities (-0.15), and very low correlations to bonds (0.22), real assets (0.05), and even other managed futures strategies (0.10), from its December 2011 inception through June 30, 2015. For more information, visit the fund page at 361 Capital . Past performance is not necessarily indicative of future performance.

FFFDX: A Target Date Fund In Need Some Work

Summary FFFDX offers investors a high expense ratio to go with a needlessly complex portfolio. Investors seeking superior risk adjusted returns could go with allocations as simple as SPY + any long term treasury ETF. By incorporating an enormous volume of other mutual funds the target date fund incorporates a higher expense ratio with suboptimal holdings. If the fund needs exposure to the total US market, they can ditch the complicated combination of funds and just use FSTVX (Disclosure: long FSTVX). Lately I have been doing some research on target date retirement funds. Despite the concept of a target date retirement fund being fairly simple, the investment options appear to vary quite dramatically in quality. Some of the funds have dramatically more complex holdings consisting with a high volume of various funds while others use only a few funds and yet achieve excellent diversification. My goal is help investors recognize which funds are the most useful tools for planning for retirement. In this article I’m focusing on the Fidelity Freedom 2020 Fund (MUTF: FFFDX ). What do funds like FFFDX do? They establish a portfolio based on a hypothetical start to retirement period. The portfolios are generally going to be designed under Modern Portfolio Theory so the goal is to maximize the expected return relative to the amount of risk the portfolio takes on. As investors are approaching retirement it is assumed that their risk tolerance will be decreasing and thus the holdings of the fund should become more conservative over time. That won’t be the case for every investor, but it is a reasonable starting place for creating a retirement option when each investor cannot be surveyed about their own unique risk tolerances. Therefore, the holdings of FFFDX should be more aggressive now than they would be 3 years from now, but at all points we would expect the fund to be more conservative than a fund designed for investors that are expected to retire 5 years later. What Must Investors Know? The most important things to know about the funds are the expenses and either the individual holdings or the volatility of the portfolio as a whole. Regardless of the planned retirement date, high expense ratios are a problem. Depending on the individual, they may wish to modify their portfolio to be more or less aggressive than the holdings of FFFDX. Expense Ratio The expense ratio of Fidelity Freedom® 2020 is .66%. That expense ratio is simply too high. Investors using a target date fund need to keep an eye on those expenses. It is possible to create a very efficient portfolio using only a few funds. Ideally the funds selected for building the portfolio would be selected for offering excellent diversified exposure at very low expense ratios. At the most simplistic level, an investor is looking for domestic equity, international equity, domestic bonds, and international bonds. If any of those had to be left out, the international bond allocation is the least important. In my opinion, there is no need to use both growth and value indexes. There is no need to individually use large, medium, and small-cap allocations. For instance, the Fidelity Spartan® Total Market Index (MUTF: FSTVX ) has a net expense ratio of .05% and offers exposure to the vast majority of the U.S. market. If you were building a target date fund from Fidelity funds, you could simply use FSTVX and eliminate all other domestic equity funds. This method would provide investors with a low expense ratio on the underlying domestic equity position and excellent diversification. That is precisely why I am including FSTVX as a holding in my portfolio. Holdings / Composition The following chart demonstrates the holdings of Fidelity Freedom® 2020: If you were making a target date fund, how many allocations would you need? Hopefully it wouldn’t be that many. Note that the holdings chart above simply showed the equity funds. There is another long list of funds for bond exposures. There is simply no need for a portfolio to be this complex. For comparison, Vanguard’s Target Retirement 2020 Fund (MUTF: VTWNX ) includes only five allocations and one of them is less than one percent. Volatility An investor may choose to use FFFDX in an employer sponsored account (if their employer has it on the approved list) while creating their own portfolio in separate accounts. Since I can’t predict what investors will choose to combine with the fund, I analyze it as being an entire portfolio. (click to enlarge) When we look at the volatility on FFFDX, it is dramatically lower than the volatility on the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). That shouldn’t be surprising since the portfolio has some large bond positions. Over the last five years it has significantly underperformed SPY, but that should be expected given the much lower beta and volatility of the fund. Investors should expect this fund to retain dramatically more value in a bear market and to fall behind in a prolonged bull market. Despite that expectation, for having a beta of .56%, delivering less than half the gains of the S&P 500 is really sad. It isn’t like the portfolio simply has an enormous amount of cash sitting around. A target date fund should have a substantial allocation to treasury securities. As you might recall, treasury securities did fairly well. Over the last five years the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) was up 36.4%. Want lower volatility with better annualized returns? Simply combine TLT and SPY as demonstrated in this hypothetical portfolio: (click to enlarge) This portfolio produces a lower level of annualized volatility and superior returns despite having only two tickers. SPY provided domestic equity and TLT provided long term treasury exposure. The reason to have a target date portfolio is so that it is automatically readjusted over time to reduce risk (at the cost of expected return). Opinions The first change I would want to make here is to see a lower expense ratio and a dramatically simplified portfolio of holdings. There is no need for a large complicated portfolio. To drive annualized volatility down while using Fidelity funds, I would favor using the Spartan ® Long-Term Treasury Bond Index Fund – Fidelity Advantage Class (MUTF: FLBAX ). The fund has a very high weighted average maturity (around 25 years), over 99% of the portfolio is in treasury securities (low credit risk), and an expense ratio of only .1%. That is a good solid mutual fund and using it in a target date portfolio fund with regular rebalancing allows investors to automatically take advantage of the negative correlation that long term treasuries have with the domestic equity market. Conclusion When an investor takes on an expense ratio that is even .3% higher and pays that ratio for 20 years, they are looking at losing 6% of the value of the portfolio without accounting for compounding. If investors account for the benefits of compounding and assume annual returns are positive, the potential value lost is even greater than 6%. FFFDX is an expensive option for investors looking for a simple “set it and forget it” retirement plan from their employer sponsored retirement accounts. The volatility of the fund is not a problem and the total exposures are not unreasonable. The problem comes down to two issues. One is that the fund has needlessly complicated the portfolio holdings and the other is that the expense ratio is simply too high when compared to similar products offered by competitors. There are some great funds offered by Fidelity and I have positions in a few of them. Unfortunately, this fund just falls short of the mark. Disclosure: I am/we are long FSTVX. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.