Tag Archives: mutual funds

The Best Mutual Fund For A Conservative Investor Retiring Today

Summary The Vanguard Target Retirement 2015 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 2015 Fund Inv (MUTF: VTXVX ). This is the kind of fund I would suggest for using in a 401K account in planning out a safe retirement strategy . What do funds like VTXVX 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 VTXVX 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 VTXVX. Expense Ratio The expense ratio of Vanguard Target Retirement 2015 Fund is .16%. 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. Bonds or Stocks The Vanguard Target Retirement 2015 fund is currently using a fairly equal allocation between bonds and stock. Over time that allocation will shift to hold more bonds and fewer stocks. The next section breaks it down further. Holdings / Composition The following chart demonstrates the holdings of the Vanguard Target Retirement 2015 Fund: (click to enlarge) This is a fairly simple portfolio. Only five total tickers 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 create most of the returns are very solidly diversified passive index funds. The Vanguard Total Stock Market Index Fund (NYSEARCA: VTI ) is also available as an ETF. 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 VTXVX 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 VTXVX, it is dramatically lower than the volatility on SPY. That shouldn’t be surprising since the portfolio has some large 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. The chart above used returns since 2003 so it included a fairly solid fall in 2007. As you can see, the worst drop was significantly less damaging than what the S&P 500 incurred. However, this fund is being regularly rebalanced towards a more conservative weighting and the current portfolio is more conservative than the weightings would have been in 2007. The following chart isolates the last 5 years. (click to enlarge) The volatility has dropped down even further and the beta has fallen from .57 to .52. Within a few years that beta will probably fall under .50. The worst drawdown in the last 5 years was substantially less damaging for VTXVX than it was for the broad equity market. Opinions Warren Buffet has suggested that investors would be wise to simply buy the S&P 500 because many will underperform the market after adjusting for trading costs. To be fair, many will underperform the S&P 500 even before trading costs. For investors that can take on the risk of pure equity positions, that is fine. For investors that don’t have that luxury, this is a remarkably complete fund that works incredibly well as the core of a portfolio. For the investor nearing retirement with this as an option in their employer sponsored account, it should receive extremely strong consideration. Conclusion VTXVX 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 walk out the employer door for the last time in the very near future. Vanguard doesn’t create target retirement date funds for every year, so the next option after this one is the 2020 fund. There is one thing I’d still like to see Vanguard do with this fund. I’d love to see them make an ETF version for easier use in taxable accounts and for investors with different brokerages.

Money Markets On The Money With $10.3 Billion Gain

By Patrick Keon Lipper’s fund macro-groups (including both mutual funds and exchange-traded funds [ETFs]) had aggregate net inflows of $8.6 billion for the fund-flows week ended Wednesday, September 23. This activity marked the second consecutive week of overall positive flows; the groups took in $4.7 billion of net new money the prior week. Money market funds (+$10.3 billion) saw the largest net inflows this past week, while municipal bond funds (+$231 million) also experienced positive flows. Equity funds (-$2.0 billion) suffered the largest net outflows, while taxable bond funds had net outflows of $33 million for the week. The S&P 500 Index (-56.55 points) and the Dow Jones Industrial Average (-460.06 points) were down 2.83% and 2.75%, respectively, for the week. Both indices suffered the lion’s share of their losses during two trading days (Friday, September 18 and Tuesday, September 22). The major market news of the week was the Federal Reserve’s decision to leave interest rates unchanged. Despite an improving U.S. labor market, Fed Chair Janet Yellen cited the inflation rate (which is significantly below the 2.0% target) and global growth concerns (China) as the reason for keeping rates where they are. The Fed’s inaction was the main impetus for the losses incurred by the indices, as it created fear about the depth of China’s economic problems and uncertainty about when the Fed will raise rates. In an attempt to jawbone the market, Atlanta Fed President Dennis Lockhart said he still expects the Fed to hike rates later this year because of stronger jobs data outweighing the below-target inflation rate. The statement achieved its desired result (at least temporarily), with the market posting gains on the day of the statement (Monday, September 21) before retreating again on Tuesday, September 22, on renewed concerns about the slumping global economy. The net inflows for the week into money market funds (+$10.3 billion) broke a three-week string of net outflows for the group, which saw almost $29 billion leave its coffers. Institutional money market funds accounted for the entirety of the net inflows this past week, taking in just over $13.0 billion of new money. Equity ETFs were responsible for all of the net outflows (-$4.9 billion) for the week, while equity mutual funds had $2.9 billion of net inflows. Non-domestic equity funds took in the majority of the net new money (+$2.2 billion), while domestic equity funds contributed $673 million to the total. The SPDR S&P 500 Trust ETF ( SPY , -$8.3 billion) was responsible for all of the net outflows on the ETF side. In a reverse of the equity fund activity, taxable bond mutual funds (-$1.4 billion net) had money leave, while ETF products had $1.3 billion of net inflows. Lipper’s Core Bond Funds classification (-$2.3 billion net) was by far the largest contributor to the outflows on the mutual fund side, while for ETFs the iShares 20+ Year Treasury Bond ETF ( TLT , +$414 million) and the iShares iBoxx $ High Yield Corporate Bond ETF ( HYG , +$212 million) had the two largest net inflows. Municipal bond mutual funds took in $322 million of net new money, breaking a streak of four straight weeks of net outflows. Funds in Lipper’s national municipal bond fund group contributed $338 million of net inflows to the total, while single-state municipal bond funds saw $16 million leave.

Revisiting 10 Asset Allocation Funds Amid Market Turmoil

Earlier this year, I reviewed ten asset allocation mutual funds with a range of strategic designs as an academic exercise for exploring how multi-asset strategies stack up in the real world. Seven of the ten funds post losses for the trailing one-year period through yesterday (Sept. 22), along with one flat performance and two modest gains. One lesson in all of this is that investment success (or failure) is usually driven by two key factors: asset allocation and the rebalancing methodology. For the elite who beat the odds, the source of their success is almost certainly bound up with superior rebalancing methodologies that shine when beta generally takes a beating. Earlier this year, I reviewed ten asset allocation mutual funds with a range of strategic designs as an academic exercise for exploring how multi-asset strategies stack up in the real world. Not surprisingly, the results varied, albeit largely by dispensing a variety of gains as of late-February. But that was then. Thanks to the recent spike in market volatility (and the slide in prices), a hefty dose of red ink now weights on these funds. Seven of the ten funds post losses for the trailing one-year period through yesterday (Sept. 22), along with one flat performance and two modest gains. This isn’t surprising considering the setbacks in risky assets over the last month or so. But the latest run of weak numbers is also a reminder that asset allocation comes in a variety of flavors and the results can and do vary dramatically at times. One lesson in all of this is that investment success (or failure) is usually driven by two key factors: asset allocation and the rebalancing methodology. Of the two, rebalancing is destined to be a far more influential force through time. Assuming reasonable choices on the initial asset mix, results across portfolios – even with identical allocation designs at the start – can and will vary by more than trivial degrees based on how the rebalancing process is executed. And let’s be clear: it’s no great challenge to select a prudent mix of asset classes to match a given investor’s risk profile, investment expectations, etc. Tapping into a solid rebalancing strategy (tactical or otherwise) is a much bigger hurdle. But at least there’s a solid way to begin. For most folks, holding some variation of Mr. Market’s asset allocation strategy – the Global Market Index, for instance – will do just fine as an initial game plan. The choices for tweaking this benchmark’s design will cast a long shadow over results if the weights are relatively extreme – heavily overweighting or underweighting certain markets, for instance. Otherwise, the details on rebalancing eventually do most of the heavy lifting, for good or ill as time rolls by. With that in mind, we can see that most of our ten funds have had a rough ride recently. The reversal of fortune has been especially stark for the Permanent Portfolio (MUTF: PRPFX ) this year. After leading the pack on the upside in April and May (based on a Sept. 23, 2014 starting point), the fund has since tumbled and suffers the third-worst slide among the ten funds for the trailing one-year return. (click to enlarge) At the opposite extreme, we have the Bruce Fund (MUTF: BRUFX ) and the Leuthold Core Investment Fund (MUTF: LCORX ), which are ahead by around 3.5% for the past 12 months. Those are impressive results vs. the rest of the field. Note the relative stability for BRUFX and LCORX over the past month or so. Is that due to superior rebalancing strategies? Or perhaps the funds beat the odds by concentrating on asset classes that fared well (or suffered less) in the recent and perhaps ongoing correction? We can ask the same questions for the other funds in search of reasons why performance suffered. In any case, the answers require diving into the details. A good start would be to run a factor-analysis report on the funds to see how the risk allocations compare. Another useful angle for analysis: deciding how much of the performance variations are due to what might be considered asset allocation beta vs. alpha. A possible clue: BRUFX’s longer-run results are also impressive while LCORX’s returns are relatively mediocre in context with all of the ten funds, as shown in the next chart below. Is that a hint for thinking that BRUFX’s managers have the golden touch in adding value over a relevant benchmark? Maybe, although the alternative possibility is that the fund is simply taking hefty risks to earn bigger returns. In that case, the risk-adjusted performance may not look as attractive. Perhaps, although several risk metrics (Sharpe ratio and Sortino ratio, for instance) look encouraging and give BRUFX an edge over LCORX, according to trailing 10-year numbers via Morningstar. (click to enlarge) Meanwhile, keep in mind that an investable version of the Global Market Index – a passive, unmanaged and market-weighted mix of all the major asset classes – is off by roughly 5% for the trailing one-year period. That’s a middling result relative to the ten funds, which isn’t surprising. In theory, a market-weighted mix of a given asset pool will tend to deliver average to modestly above-average results vs. all the competing strategies that are fishing in the same waters. In other words, most of what appears to be skill (or the lack thereof) is just beta – even for asset allocation strategies. But there are exceptions. That doesn’t mean that we shouldn’t customize portfolios or study what appear to be genuine advances in generating alpha in a multi-asset context. But as recent history reminds once again, beating Mr. Market at his own game isn’t easy. But for the elite who beat the odds, the source of their success is almost certainly bound up with superior rebalancing methodologies that shine when beta generally takes a beating.