ELS TechNote Series

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1 ELS TechNote Series Portfolio Stochastic Design Scans: Target Date Retirement Income Funds Edward L. Stanton, Ph.D. CTO Emeritus MSC Software Corporation In the end, how your investments behave is much less important than how you behave. Benjamin Graham The Intelligent Investor 1

2 Introduction The First Target Date Funds Early in a March 1994 NY Times article by Saul Hansell he indicated Target Date Retirement (TDR) funds were being designed to serve the Baby Boomer 401k market. The first two Target Date Retirement funds I could find entered the market 20 June 1996; one from Wells Fargo, STWRX, and one from Barclays, STLAX (now BlackRock). Both are Income funds and they are both still actively traded. Based on Yahoo historic price data I believe the first 5 TDR Income funds were, 20 June 1996 STLAX Barclays (BlackRock) 20 June 1996 STWRX Wells Fargo 21 May 1997 FFFAX Fidelity 05 Nov 2002 TRRIX T. Rowe Price 27 OCT 2003 VTINX Vanguard Also among the early Income funds was one from NestEgg introduced in 1999 and liquidated in Today dozens of TDF Income funds are available from almost all Mutual fund companies and many Banks. On a 5yr basis Income funds are the best TDF fund in every 401k Plan I have scanned but almost never the largest TDF fund asset allocation. Interesting. Those near or in retirement may want to reconsider their 401k TDF asset allocation if they need retirement income. Early Retirement Income Fund Portfolios This TechNote looks at the investment composition of the early TDR Income funds and compares their 5yr performance during the period 2008 to 2012 with their Balanced portfolio performance. I use Morningstar data for each Income fund s holdings and Thomson-Reuters 2

3 provides 5yr market data for the design scans of each portfolio s investment holdings. The Vanguard VTINX fund has been the best performer in this period. As you can see the Balanced portfolio is almost 1% better in APR and much less volatile. I believe this the result of the only 4 funds in the VTINX portfolio; VBMFX, VSMX, VIPSX and VGSTX being very well diversified. The PSDS scan forecast for the VTINX portfolio 5yr performance compared above with actual VTINX Market performance shows better than expected accuracy. The second Retirement Income portfolio studied was TRRIX from T. Rowe Price and it has over 10 funds in its portfolio. In the scans I limited the number of funds to the 10 largest holdings and that was over 93% of the assets for the TRRIX portfolio. In fact the top 3 holdings PRIPX, PREIX and PRCIX are over 60% of the TRRIX portfolio. 3

4 Again the Balanced portfolio APR is higher than the Retirement Income TRRIX portfolio APR = 4.08% and less volatile. In the relatively short time it took to do this study both TRRIX and VTINX portfolio holdings asset allocations reported daily by Morningstar changed; mostly to reduce bond fund assets a few percent. In the case of Fidelity s Retirement Income Fund FFFAX it only has 66% of FFFAX s portfolio assets in the top 10 holdings and Fidelity reduced bond fund holdings by even more in just this short time period. Interesting. The Fidelity Income retirement fund FFFAX is definitely actively managed; a bit more than I expected. Each of these TechNotes studies helps me better see strategy differences among the major mutual fund houses. With only 66% of FFFAX in the top 10 holdings in the scan, the forecast 5yr performance and Market 5yr performance were a bit different for FFFAX. The 5yr Market APR = 3.57% was quite a bit lower and the STD 4

5 was even lower. It may indicate a conservative design strategy move or nothing in particular. I am not sure. The First Two Retirement Income Portfolios The two oldest are STLAX and STWRX. Lets start with STLAX from BlackRock formerly Barclays. They are the largest mutual fund company today and are the US Government 401k TSP plan trustee. The holdings of the STLAX portfolio include several ishares ETF funds and the top 10 holdings account for over 99% of the assets. The top 3 holdings account for over 80%. I had difficulty with symbols for a few holdings even with the help of SEC Form 497 for all of BlackRock s Funds. In the Scan I used DJP a Dow Jones commodity index ETF as a proxy for BCSAX, which does not yet have 5yr market data. 5

6 PSDS scan investment options below are in the order of the current Morningstar holdings posted for the top 5 asset allocation investments as of 8/7/2013, Core Alpha Bond LP.. BCBAX 53.09% Active Stock LP LPRAX 19.74% ishares Barclays TIPS TIP 8.78% ishares MSCI EAFE EFA 4.55% Master Small Cap MDSKX 4.46% The scan for the STLAX portfolio is little more uncertain than the other Retirement Income portfolios but all things considered it is representative. All of the Retirement Income Funds so far came from Mutual Fund companies. STWRX is from a bank, Wells Fargo, and has about holdings with less than 4% of its assets in the top 10 holdings. I am too old to even think about a PSDS scan of a portfolio that large. 6

7 However, if you think Wilshire 5000 funds, (Total Bond and Stock Market Funds, etc.) the STWRX portfolio could be just an un-bundled Vanguard VTINX portfolio. According to Morningstar STWRX s 5yr APR was 4.24% with a standard deviation of 5.43% and a Sharpe ratio of They gave the fund a 2 Star rating. I think it may be a little better than that. STWRX has the lowest 5yr standard deviation of all the Retirement Income funds in this study and the highest 5yr Sharpe ratio. 12/31/ yr Market Data APR STD PSR VTINX TRRIX FFFAX STLAX STWRX TDR Retirement Income Funds in Context These funds all provide a reliable source of income. The Black Swan year of 2008 was an exception when they were all double digit down except for STWRX. That s why Stable Value funds are in most 401k Plans. There are alternative retirement income investment funds to TDR Income funds if you search for them. Over the last 3, 5, 10 year periods the Vanguard fund VWINX is one of them. That s all for now Total Return % 1yr 3yr 5yr 10yr Wells Fargo STWRX BlackRock STLAX Vanguard VTINX T.Rowe Price TRRIX Fidelity FFFAX Vanguard VWINX