Thursday, September 10, 2009

A Look Outside of the S&P 500

I have been on the offensive lately. Actively managed mutual funds, which if you have followed what was written here, are taking quite a lot of criticism from the index camp. Attempting to twist their argument in as many directions as possible, refining the debate to include survivor fund rates and using numbers that skew how actively managed funds compare to their inactively managed cohorts.

I argue that the benchmark is wrong. But to get a broader look at how different categories are doing, indexes do provide a good overview of performance. Some actually come very close to doing what actively managed funds attempt in those categories; others do not.

Here is a list of how these categories did through the end of August 31st. Keep in mind, the year-to-date performance of the S&P 500 is 18.2% to the plus side. Do you know where your risk is?

Latin America Stock/62.3%
Diversified Emerging Mkts/47.9%
Pacific/Asia ex-Japan Stk/45.7%
Foreign Small/Mid Growth/34.7%
Bank Loan/33.6%
Foreign Small/Mid Value/33.2%
Europe Stock/32.3%
High Yield Bond/32.2%
Miscellaneous Sector/30.7%
Equity Precious Metals/26.4%
Diversified Pacific/Asia/25.7%
Global Real Estate/25.3%
Foreign Large Growth/25.0%
Equity Energy/24.6%
Mid-Cap Blend/24.3%
Mid-Cap Growth/23.9%
Emerging Markets Bond/23.8%
Natural Res/23.7%
Consumer Discretionary/23.4%
Foreign Large Value/22.6%
World Stock/22.5%
High Yield Muni/22.2%
Foreign Large Blend/21.8%
Mid-Cap Value/21.6%
Small Growth/21.1%
Large Growth/21.1%
Target Date 2050+/20.7%
Target Date 2036-2040/19.9%
Target Date 2041-2045/19.5%
Small Value/19.4%
Small Blend/19.2%
Multisector Bond/19.2%
Target Date 2031-2035/19%
Target Date 2026-2030/18.7%
Target Date 2021-2025/18.2%
Large Blend/16.7%
World Allocation/16.5%
Target Date 2016-2020/16.1%
Moderate Allocation/15.6%
Target Date 2011-2015/15.5%
Target Date 2000-2010/15%
Muni Single State Long/14.9%
Large Value/14.5%
Consumer Staples/14.3%
Muni New York Long/14.1%
Muni New Jersey/13.9%
Conservative Allocation/13.8%
Muni National Long/13.5%
Retirement Income/13.3%
Muni California Long/13.1%
Real Estate/13%
Muni Massachusetts/13%
Muni Pennsylvania/12.9%
Muni Minnesota/12%
Japan Stock/11.9%
Long-Term Bond/11.9%
Intermediate-Term Bond/10.6%
World Bond/10.3%
Muni Ohio/9.8%
Muni Single State Interm/9%
Muni National Interm/8.7%
Muni New York Int/Sh/8.6%
Muni California Int/Sh/8.1%
Short-Term Bond/7.4%
Inflation-Protected Bond/6.9%
Ultrashort Bond/6%
Muni Single State Short/4.7%
Muni National Short/4.3%
Intermediate Government/3.7%
Short Government/2.6%
Long Government/-11.3%
Bear Market/-27.2%

Tuesday, September 8, 2009

Good Idea No Matter How You Shake It!

Can President Obama do anything with the GOP jumping down his neck, throwing outrageous accusations and false conclusions? No president will make every constituent happy. There is always bound to be someone, somewhere, most likely on Fox News, to make the argument that the intention of whatever the president plans is against some sort of inalienable right.

In the case of his retirement plan suggestion, the best move in quite a while, the right has paraded all sorts of nationalization rhetoric out, town-hall style to impede the plan.

First, the Plan
In order to get people to invest in their future, something 75 million Americans have failed to do or have done so inconsistently, the president is picking the low hanging fruit first. Most 401(k) plans were designed to allow employees to opt-in. This allowed those who understood what these plans provided to take advantage of them, often to the fullest while leaving those who had no or only rudimentary understanding of the value of these plans on the sidelines.

Creating an opt-out plan will net many of those who have failed to make the effort. By making the contribution to the plan 3%, the tax-deferred investment will not have any impact on an employees take-home pay. If they can see the value of not losing and pay as a result of the effort, there is a good chance they will stay with the plan.

President Obama made no direct calls to Wall Street or to the businesses that offer these plans to simplify them. This is probably, at least in the short-term, a good thing. Oversimplification of these plans will lead to less-risk in an effort to assure these new investors that their money invested will not be lost. This would be too bad and easily rectified by suggesting that these plans invest in the future, not save for it.

Second the Contribution
As many swords are, this one is double edged. Allowing you to put unused vacation pay into the plan may see less vacation time being taken. But I doubt it. The increased pressures in this sort of economy (ramped up production, less workers with the same work load) make vacation a necessity as never before. But squirreling some away, added to your regular payroll contributions and not going over the annual contribution limits would allow a worker to grab a few more investable dollars that they may not have had. Some companies have a "use it or lose it" policy when it comes to this type of pay. Investing would be a big plus for these folks.

Third, the Tax-Refund
I suspect that this idea will not be used by many people who look forward to that big tax rebate. Often poor and always unprepared, these people have too much income taken from their paycheck each week. Then, as soon as the new year turns, they are pre-spending this false savings, paying off Christmas excesses or simply splurging on something they could otherwise not have afforded. But for those that do take advantage of the plan, this is a golden opportunity to make some money. You do not need a Treasury account or even a bank account; simply check the box on your income tax form.

Fourth, the Rollover Roadmap
Numerous individuals do not understand the importance of a rollover. When it comes to retirement planning, taking a former 401(k) plan and choosing between a rollover to an IRA or taking a lump sum, far too many people take the cash. Economic reasons aside, this is a bad idea. The penalties and taxes seriously diminish the net proceeds and put you years behind when it comes to pinpointing a date when you would like to retire. With any luck, the effort to explain the consequences will mean less folks will do the wrong thing.

Fifth, the Approval
The upsides are numerous. Better access to plans with newer options to put away money for the future coupled with some straightforward talk may just do the trick. There will be resistance, as there always is. But if these folks take advantage of these new options, they, and the country will be set on the right course. The other upside, it can be enacted with Congressional approval.

Wednesday, September 2, 2009

Mutual Funds Explained: Options in Your Retirement Plan

No doubt about it, your options in your retirement plan are about to change. There could be some questions about whether they need to or not. But rest assured, the effort is under way and many of these changes will not be seen as beneficial for the majority of us.

Cost cutting is one of the ways businesses had hoped to survive the economic downturn that is now a year old. Payroll has been chopped (including paychecks), inventories have been reduced (to accommodate the skeptical and mostly unwilling buyer at the retail level) and in many instances, the matching contribution that so many companies offered as an incentive has been greatly reduced or eliminated (and there is no expectation that this will change before 2011 0 if ever).

All of these moves have resulted in a stock market that has risen since the turn of the calendar year (the Dow is up 3,000 points since January). This vote of confidence by investors has encouraged companies to continue to trim any portion of their balance sheet that might be too costly. Keep in mind that these moves do not grow a business; they merely sustain it. Keeping it propped up in this way is a topic for another discussion. But the trend is alarming.

This cost-cutting mentality has found its way into your 401(k). In the coming months, expect the recent trend to continue. One way of doing this is to add funds with lower costs. According to survey conducted with 85 senior level executives (downloadable pdf), whose jobs require them to find every nickel and dime on the balance sheet, the change is just beginning.

Over half of those surveyed have or plan to make changes to their 401(k) offering by the end of 2009. Those changes will result in less equity funds available than there were just two years ago. What they plan no adding is more funds with longer durations, such as bond funds with long maturities.

This change has resulted in the firing (and in some cases the hiring) of different fund managers. This change has seen a net decrease in the equity side of their offerings in favor of fixed income. Domestic equity funds were reduced as a result of such moves by almost 20%.

These changes have also impacted the default investment side of the equation. Ninety-three percent of those surveyed now offer a default plan for those who have not signed up with 71% of those plans directing their employees to target-dated funds.

These execs also plan on implementing a stress test to these plans in an attempt to insure that certain predetermined funding requirements are met. This move does not necessarily offer additional disclosures for plan participants, ebven as Congress is looking into requiring such actions.

While taking fiduciary responsibility has been lax in the past, numerous companies are looking at adding some sort of monitoring system to protect their risk of liability for not doing so. According to Carl Hess, global director of investment consulting at Watson Wyatt “The uptick in activity could be a sign that many funds were caught off guard by the crisis and are now trying to mitigate their risk exposure."