Tag Archives: Morningstar

Target-Date Funds Are Cruise Control Of Investing

Target-date, or life cycle, funds are the cruise control of investing. After you choose which fund to invest in, the fund does all the work for you. You don’t have to think about it again until retirement.

Many target-date mutual funds are funds of funds. They hold a selection of equity funds, such as large-cap, small-cap and international funds, and a selection of fixed-income funds of multiple durations and yields.

The appeal of target-date funds is that they take care of all the asset allocation and rebalancing for you. It’s a balancing act of managing market risk, inflation risk and longevity risk.

Typically, an investor picks a target date around the time he plans to retire. When the investor is young, the fund focuses on growth and mostly holds stock funds. But as the investor gets closer to retirement, the fund’s asset allocation becomes more conservative and focuses on fixed income. The changing asset allocation is called the glide path.

Target-date funds hit the public consciousness after the Pension Protection Act of 2006. The legislation allowed 401(k) plan sponsors to make life cycle funds the default investments for participants who didn’t choose their own funds. The logic was that since investors were now in charge of their own retirement funds, sitting in cash wasn’t going to get them there.

“For the past nine years that we’ve been keeping track, there has been double-digit growth in assets, ever since Pension Protection came out,” said Janet Yang, Morningstar’s target-date fund analyst.
In 2006, of all the 401(k) plans, 57 offered target-date funds. In 2012 the number had jumped to 72, according to the Investment Company Institute.

In 2006, only 19% of 401(k) plan participants held target-date funds. Six years later it was 41%. Also, in 2006 target-date funds made up only 5% of 401(k) assets. By 2012 that had jumped to 15%.
By the end of Q2 2012, target-date mutual funds held $678 billion, said Sarah Holden, the ICI’s senior director of retirement and investor research. The majority of those assets were held in retirement accounts. Defined contribution plans held 68% of the total, and individual retirement accounts 20%. The rest was in the personal accounts of investors looking for the glide path approach.
Vanguard, Fidelity and T. Rowe Price have the largest target-date funds.

Families of target-date funds can have different philosophies, which can lead to wide dispersions in the holdings, returns and fees for funds with the same target year. Recently, fees have become a big issue, and that has helped move plan sponsors toward index-based funds.

“Each client’s needs are going to be different,” said Don Wilson, chief investment officer at BrightWorth, an Atlanta asset manager. “Some target-date funds will be too risky, while others won’t be risky enough.”

Wilson said that if the investor picks his 65th birthday as the target date, he may have 20 years of retirement ahead of him. He may need to have more equities to help his account grow and outpace inflation. The target-date fund may not be taking this into account.

The only ETF provider with target-date portfolios now is Deutsche X-trackers.

For Full story go to Investor’s Business Daily.

Morningstar Hosts a Passive Vs. Active Debate

Morningstar this week is running a series debating the merits of passive investing vs. active investing.

Passively-managed investing is the strategy of capturing the market’s returns by holding a benchmark for a specific asset class. This is typically achieved with an index fund. Active investing attempts to earn a return better than the market benchmark. It does this by actively buying and selling stocks and bonds it thinks will outperform the benchmark.

Considering the mutual fund industry is based on actively managed investing, with a small percentage of passive funds, while 99% of the ETFs are passive investments, this debate is pretty basic to what kind of funds you want do hold in a portfolio. Building a portfolio with ETF is a tacit acceptance of the many benefits of passive over active.

Morningstar announced today that this week its analysts and strategists–including director of personal finance Christine Benz–will weigh in on active and passive investing techniques. They will clarify the state of the debate, look at ways to optimize both active and passive approaches, and offer suggestions on the best ways to combine the two. On Friday, several Morningstar experts will sit down for a live video roundtable discussion on getting the most out of active and passive strategies.

Here is the week’s lineup that can be accessed on Morningstar.com. The most relevant for ETF investors is on Wednesday, when Morningstar’s ETF team will look at how to pick the best passive funds and the hidden costs of indexing.

Monday | September 12: Clarity on the Active/Passive Divide

Hear from Morningstar’s Don Phillips, Russ Kinnel, and Christine Benz as they explore the pros and cons of using an active or a passive strategy.

Active or Passive Strategies: How to Choose?: 
Decide what attributes you value most, then go from there.

Silly Season for the Active/Passive Debate
: Here are five of the goofiest arguments for and against indexing.

Index Versus Active: What the Data Say
: Focusing on low expenses helps investors succeed, regardless of whether they take the active or passive route.

Indexing Extremists
: It’s time for the leaders of the index movement to step up and reclaim the intellectual honesty that their early supporters advocated, says Morningstar’s president of fund research Don Phillips.

The Odds Favor Index Investors: 
A low-cost index portfolio has the greatest probability for meeting long-term financial goals, says Rick Ferri.

From the Archive: What the Data Say on Active vs. Passive Funds: 
Morningstar’s John Rekenthaler on the percent of active managers who have outperformed, if active is really better in some categories, and the strongest predictors of success. (video)

Tuesday | September 13: Better Active Investing

The active investment strategy gets first treatment with Christine Benz sharing her favorite active funds and discuss how to build a portfolio of strong managers.

Wednesday | September 14: Better Passive Investing

Morningstar’s ETF team will look at how to pick the best passive funds and examine some of the hidden costs of indexing. Christine Benz will share her favorite index funds and offer five pitfalls passive investors should avoid.

Thursday | September 15: Active/Passive: Why You Don’t Have to Choose

Choosing between active and passive investments is not an all-or-nothing proposition. On Thursday, Morningstar will look at combining the best of both worlds in your portfolio.

Friday | September 16: Roundtable–Getting the Most Out of Active and Passive Strategies

Morningstar’s Christine Benz, John Rekenthaler, Scott Burns, and Michael Breen discuss the benefits and drawbacks of various active and passive strategies.

Survey Finds Nearly Half of Advisors Don’t Do Monthly Reviews

Rydex Investments, the sponsor of leveraged ETFs and the CurrencyShares, exchange-traded products that track foreign currencies, released its Advisor Benchmarketing Supplemental Survey this week. Here are some highlights:

· Most of the advisors (55%) surveyed review the ETF universe and their clients’ ETF holdings monthly.

That may be the majority, but is a little more than half really most advisors? Is this a positive statistic? Well, let’s flip it around. Nearly half (45%) of all advisors DON’T review the ETF universe and their clients’ ETF holdings monthly. So, the odds are nearly 50/50 that your advisor isn’t on top of things. That’s not what I want to hear. Let’s hope your advisor isn’t one of them.

· Open-ended mutual funds and ETFs will be a primary vehicle or product focus for 2009 for investments, according to 98% and 83% of advisors respectively.

That agrees with what I’ve been saying for months. In fact, I think ETFs will surpass mutual funds in the cash inflows for 2009.

· When selecting ETFs for their clients’ portfolios, investment objective and index exposure are the most important criteria, according to 60% of advisors surveyed. The second and third most important decision making criteria are fees (45%) and benchmark tracking accuracy (35%), respectively. It’s interesting to note that more than a third of advisors (38%) do not find Morningstar rankings (or rankings from other research providers) important as decision criteria for ETF investment.

It makes sense that you have to decide what you want before you look at fees. I’m curious to know why so many advisors don’t use the Morningstar rankings.

· Most (80%) of the advisors surveyed said that they are knowledgeable on the differences between ETNs and ETFs, with almost all of them declaring themselves ‘very knowledgeable’ on the tax consequence differences between ETNs and ETFs (97%). Only about a third (30%) are knowledgeable on tracking error differences between the two.

Tracking error is the difference in return between an index fund and the index it follows. This typically results from the costs required to create and hold a portfolio of securities. Index funds should shoot for a tracking error of less than 10 basis points. Since ETNs don’t hold securities, they don’t incur any costs to create or hold a portfolio. They are merely a promise by the issuing bank to pay the return of the index. Thus, a well run ETN should have no tracking error.

· When advisors research different ETF choices, more than half (55%) use the Morningstar ETF center, 40% use the Yahoo! Finance ETF Center and about one third (34%) use ETF provider sites.

For my list of the best sites for researching ETFs check out How to Decide Which ETFs Are Best for You.

· Despite the current economic situation, ETF assets grew to more than $725 billion globally by the end of 2008, according to consulting firm Strategic Insight, and are expected to continue growing in assets over the next few years.

According to the Investment Company Institute, the trade group for the mutual fund and ETF industries, in 2008 U.S. mutual fund assets fell 20% year-over-year to $9.6 trillion, while U.S. ETF assets slid 12.7% to $531.3 billion. I will address the growth in ETF assets in another posting, but that attests to the growth of ETFs outside the U.S.