Tag Archives: mutual-fund

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.

Don’t Be An Investment Hero: Avoid The Temptation Of That Brazilian ETF

MSCI Brazil is down 75% in USD since 2008 which could spark some intrigue for contrarian investors. However, the equity market is still 300% higher than 2003. Given the poor economic picture, valuation levels that aren’t a screaming buy, optimistic analyst expectations for the future, and a very negative technical set-up, investors should be looking elsewhere. For the contrarian investor out there, it is always tempting to invest in downtrodden markets. Many times buying into an equity market that has been out of favor can be a profitability investment strategy. However, this type of strategy takes a lot of patience and time because picking the bottom in any market is extremely difficult. Cheap stocks can always get cheaper. A stock market that is off 75% from a recent high may seem like a screaming buy. But is it actually a screaming buy if that same market is still, amazingly, up over 300% over the past 13 years? Aren’t there plausible scenarios where this market could halve from current levels but that would still mean it is 200% higher over the past 13 years? This is the quandary facing investors who want Brazilian exposure. In USD terms, MSCI Brazil is now back to levels last seen in 2005. However, as we stated above, it is still 300% higher than the 2002 low even as it is 75% off the 2008 high. So is now an interesting time to invest in Brazil? While it feels like it can’t get worse, we believe investors shouldn’t try to be a hero in this market. (click to enlarge) The Brazilian economy is in shambles. Exports are in a free fall down 24% year-over-year. Industrial production is declining at the fastest year-over-year rate since 2009 and has had a negative year-over-year growth rate for 16 months. The unemployment rate has spiked to a five-year high while retail sales are declining at a pace last seen in 2003. Finally, even with excess capacity in the economy increasing and consumption slowing, Brazil is combating inflation as the CPI increased at 9.5% year-over-year rate in August. With this type of economic back drop its fairly easy to understand the pressure that Brazilian stocks have been under. What is harder to understand is how valuations have stayed so high. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) No matter which valuation level you look at, Brazil still isn’t cheap. The median price to cash flow level for the MSCI Brazil Index is still 8.58x. This is nearly 3x the trough level during the financial crisis. The median price to earnings ratio has fallen much more than price to cash flow, but it to remains well above 2008 lows. It currently stands at 13.84x which is only slightly below the average level since 2007. Where valuations are starting to look intriguing at least is when we look at median price to sales and median price to book ratios. The median prices to sales has dropped to just 1.11x which is the lowest level since 2009. The median price to book is at 1.59x which is on the low end of the last couple of years but still higher than in 2012 and 2008-2009. Overall, valuation levels still aren’t at levels to make it worthwhile for investors to take the plunge. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Given the economic backdrop, the outlook for Brazilian stocks remains surprisingly optimistic as analysts’ earnings expectations still seem out of step with the current situation. Over the past decade, Brazilian stocks have increased EPS by 12% annually. Currently, consensus EPS estimates for this year are very negative at -25.8%. However, analysts expect Brazil to be able to make up for this growth in the following three years by averaging a robust 20.3% growth rate from FY2-FY4. This seems like an incredibly high hurdle for Brazil to leap over even as these growth expectations start from a depressed level after this year. Finally, from a relative technical perspective the iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) remains firmly in a down trend relative to the MSCI All-Country Index. This ETF looks like it is years away from forming a base relative to the global equity market let a lone beginning to outperform. It recently broke down to a new four-year relative low. All in all, given the poor economic picture, valuation levels that aren’t a screaming buy, optimistic analyst expectations for the future, and a very negative technical set-up, investors should be better off allocating their scarce investment capital to more productive equity markets around the globe. The original posting of this article can be found here . All data was created by the author and sourced from Gavekal Capital, MSCI and FactSet. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

VTTVX: This Is A Great Option For The Investor Nearing Retirement

Summary The Vanguard Target Retirement 2025 Fund has a simple construction and a low expense ratio. Despite being a very simple portfolio, they have covered exposure to most of the important asset classes to reach the efficient frontier. This is quite simply one of the best constructed portfolios I’ve seen for a worker nearing retirement. 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 Vanguard Target Retirement 2025 Fund Inv (MUTF: VTTVX ). What do funds like VTTVX 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 VTTVX 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 VTTVX. Expense Ratio The expense ratio of Vanguard Target Retirement 2025 Fund is .17%. That is higher than some of the underlying funds, but overall this is a very reasonable expense ratio for a fund that is creating an exceptionally efficient portfolio for investors and rebalancing it over time to reflect a reduced risk tolerance as investors get closer to retirement. In short, this is a very solid value for investors that don’t want to be constantly actively management their portfolio. This is the kind of portfolio I would want my wife to use if I died prematurely. That is a ringing endorsement of Vanguard’s high quality target date funds. Holdings / Composition The following chart demonstrates the holdings of the Vanguard Target Retirement 2025 Fund: (click to enlarge) This is a fairly simple portfolio. Only four total funds are included so the fund can gradually be shifted to more conservative allocations by making small decreases in equity weightings and increases in bond weightings. The funds included are the kind of funds you would expect from Vanguard. The top 4 which carry almost all of the value are extremely diversified funds. The Vanguard Total Stock Market Index Fund is also available as an ETF. The ETF version is the Vanguard Total Stock Market ETF (NYSEARCA: VTI ). To be fair, Vanguard has a great reputation for running funds but not for coming up with creative names. I have a significant position in VTI because it carries an extremely low expense ratio and offers excellent diversification across the U.S. economy. Volatility An investor may choose to use VTTVX 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. Since the fund includes domestic and international exposure to both equity and bonds, that seems like a fair way to analyze it. (click to enlarge) When we look at the volatility on VTTVX, it is dramatically lower than the volatility on SPY. That shouldn’t be surprising since the portfolio has some very material bond positions. Investors should expect this fund to retain dramatically more value in a bear market and to fall behind in a prolonged bull market. Because the S&P 500 has been significantly outperforming international equity markets and 26.4% of the fund is currently in international markets, there has been an additional source of drag on the portfolio. Since October 2003 the international mutual fund is up 102.8%, just under the total return for VTTVX. Had international markets been doing better relative to domestic markets, this fund would’ve been able to stay closer to SPY while still delivering the significantly lower levels of volatility. Conclusion VTTVX is a great mutual fund for investors looking for a simple “set it and forget it” option for their employer sponsored retirement accounts. It is ideally designed for investors planning to retire around 2025, but can also be used by younger employees with lower risk tolerances or older workers with higher risk tolerances. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VTI over the next 72 hours. (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.