Objective information about retirement, financial planning and investments


Are Mutual Fund Closures a Bad Thing?


Road closed, farm road in Champaign County, Il...

You’ve been following a mutual fund for awhile and you’ve decided that this fund is a good fit for your portfolio.  You go online to make an initial purchase and you learn the fund has closed to new investments.  While you might be frustrated, overall I tend to view fund closures as a positive move in most cases.

Factors that might lead to a fund closing 

Typically the main reason that mutual funds close to new investments is that more money is coming in than the managers feel they can effectively invest.  Closely related to this is the rule that funds are only allowed to buy into the stock of a single company if that holding is 5% or less of the total value of the fund.  (Note a holding may constitute more than 5% of a fund’s value due to price appreciation).  Generally fund closures occur in actively managed mutual funds versus passively managed index products.

Fund closures benefit existing shareholders 

In my opinion, a fund closure is generally a sign of a fund company that values its shareholders.  A case in point is Artisan, a fund company based in Milwaukee.  Over the years I have used Artisan Mid Cap Value (ARTQX) extensively in several of the retirement plans for whom I serve as advisor as well in the portfolios of many of my individual clients.  The management team of this fund was named Domestic Manager of the Year for 2011 by Morningstar.

Artisan runs 12 funds, of which 5 are currently closed to new investors, including Mid Cap Value.  Even with the closure, fund assets have topped $8 billion a high for the fund.  The fund’s performance has lagged in 2011, though I don’t think that it is related to the increased size.  The fund ranks in the top 1% of all Mid Cap Value funds over the past 10 years.

The fact that Artisan is willing to close a popular fund like Mid Cap Value speaks volumes about the firm.  Shutting off the spigot of new money means that the firm will lose the fees it would collect on these assets.  Artisan is also in the process of going public.

Examples of large funds that didn’t close 

This can work both ways.  An example of a fund that in my opinion should have closed to new investment is Ariel (ARGFX).  This was an outstanding Small Cap Value fund run by John Rogers, a well-known Chicago-based value investor.  Fund assets ballooned from about $600 million in 2001 to over $4.7 billion in 2005.  The fund never closed its doors to new money and was forced to increase the market cap of the stocks held in the fund.

As a Mid Cap Blend fund, performance has largely been below average, the fund ranks in the middle of the pack for the trailing 5 years and in the bottom 25% of its category for the tailing 10 years.  Performance has picked up in recent years with the fund ranking in the top quarter of its category in 2009, 2010, and year to date in 2012.  In-between the fund ranked in the bottom 7% of its category in 2011.  This improved performance follows a significant decline in fund assets in recent years.

I haven’t followed this fund for several years and have no client money invested here.  Would shareholders have been better served had the fund closed its doors a number of years ago and stuck to the type of investing it was known for?  In my opinion yes, but I’ll leave that to others to decide.

On the flip side of this is Fidelity Contra (FCNTX).  Will Danoff manages about $85 billion in this fund and over $100 billion in this style (Large Growth) when you add in some other portfolios under his management.  The fund has placed in the category’s top 39% or better in every annual period since 2002 with the exception of 2009 (when the fund earned over 29%).  For the trailing 10 years the fund ranks in the category’s top 7%.  To be able to manage this much money as well as Danoff has year in and year out is a commendable and rare feat.

Asset bloat

While asset bloat can be a problem in any fund, it is generally a more serious issue in a fund that invests in small or mid cap stocks.  At some point there are only so many good places to invest new cash coming in.

While fund companies are in the business to make money, my experience has been that the fund companies that tend to close funds when they get too big also tend to run funds that are better performers over time.  At some point if a fund gets too big it might also become a “closet indexer.”  In those situations, why pay the fees associated with an actively managed fund?  Why not just buy an index fund or ETF?

What if my fund closes? 

Typically if you already own a fund and it closes, you be able to buy more shares if you wish.  This is not always the case, however.

If a fund that you were considering closes before you own it, look for an alternative fund.  This might be a good opportunity to consider a low cost index fund or ETF in the same asset class.

Feel free to contact me with questions about your investments.

For you do-it-yourselfers, check out Morningstar.com to analyze your investments and to get a free trial for their premium services.

Enhanced by Zemanta

4 Retirement Savings Steps to Take Now


Seal of the United States Federal Retirement T...

Updated to include 2015 retirement plan contribution limits.

As we approach the end of the year, there are any number of things to occupy our thoughts.  Holiday shopping and celebrations are at the top of many lists.  Fears of the impending Fiscal Cliff may or may not grip your thoughts financially (CNBC thinks that this is so critical that they have taken to posting a Fiscal Cliff countdown clock, journalism or entertainment?).

For those of you saving for retirement here are four retirement savings steps to take now.

Increase your 401(k) contribution level.

Is it your intention to max out your 401(k) for the year (current limits are $18,000 if you are under 50 and $24,000 if you are 50 or over at any time in 2012; these limits will remain the same in 2016)? Check your latest pay stub to see of you are on track, and adjust your withholding if you are running behind. While there is not much time left in 2015, you might be able to have additional amounts withheld from your last couple of 2015 paychecks. Even if your contributions are more modest this is a good time to take stock and see if you might be able to up your salary deferral percentage a bit. Over time even small increases in the amount saved can make a big difference in your ultimate retirement nest egg.  I urge you to take a look at your situation heading into 2016 and to consider increasing your deferrals to the extent that you can.

Start or fund a retirement plan if you are self-employed.

If you don’t have a retirement plan in place for yourself, make 2015 the year to start. Plans to consider are the SEP-IRA, the Solo 401(k), the SIMPLE, or if your business cash flow permits a Cash Balance Pension Plan. Whatever your situation, start a retirement plan for yourself. You work too hard not to reap the benefits. If you have a plan in place, make sure you fund it to the maximum amount possible.

Review your retirement plan allocation and your investment choices.  

Is your 401(k), 403(b), TSP,  or similar retirement plan account allocated in a fashion that is consistent with your retirement goals, your timeframe, and your risk tolerance?  Does your allocation fit with your overall financial plan and with outside investments (IRA, spouse’s retirement plan, taxable investments, etc.)?  This time of year is open enrollment season for the employee benefit plans of many companies.  Some companies also use this time to roll out new investment choices for their retirement plans.  While you are focused on your benefits, take the time to review your 401(k) and make adjustments.

Get a financial plan in place.

Planning for retirement is like any journey.  If you don’t know where you are headed you likely won’t know when you’ve arrived?  How much should you be saving?  How should your money be invested?  These are among the questions that a financial plan will address.  Have you been putting off hiring a financial planner to review your situation?  Have you been meaning to do this yourself but haven’t found the time?  My suggestion, lose the excuses and get this done.  Further if you do hire a professional make sure that this person is a fee-only (not fee-based) advisor who does not have the inherent conflicts that come with need to sell you financial products.

Please feel free to contact me with your financial planning and retirement questions.

Photo credit:  Wikipedia


Mutual Funds – B Shares are a Dumb Ox


I’m guessing that our family is no different from most in that we have some unique ways of communicating.  For example, beef tenderloin was a dish that my wife would make on a number of special occasions as the kids were growing up.  She cooked it in a black roasting pan with white specs, hence beef tenderloin is forever know as “polka dot pot meat” in the Wohlner house (the black roasting pan is long gone).

 English: Oxen in Marine Drive, Mumbai, India.

In this same vein, the word oxymoron has been changed to “Dumb Ox” in Wohlner speak.

Several years ago I was having lunch with a CPA who was also licensed as Broker Dealer and sold securities including loaded mutual funds to some of the firm’s clients.  I’ve never understood how a trusted advisor like a CPA could turn around and sell financial products for a commission, but that is for another post.  Over lunch the CPA said “… I know that you will disagree, but I often think there is nothing better for many clients than a good B Share…”   He’s right I do disagree, to me a “Good B Share” is the ultimate “Dumb Ox” (no offense to any Oxen intended).

Share Class Comparisons

In the world of commission and fee-based financial product sellers, one way for these brokers and registered reps to be compensated is via commissions from selling mutual funds.  The main share classes where this occurs are A, B, and C Shares.  Using the American Funds Growth Fund as an example let’s take a look at the differences in these three share classes:

Share Class Ticker Front Load Deferred Load Expense Ratio 12b-1 fee
A AGTHX 5.75% 0% 0.71% 0.24%
B AGRBX 0% 5.00% 1.46% 1.00%
C GFACX 0% 1.00% 1.49% 1.00%

Source:  Morningstar.com

The American Funds, like an increasing number of fund companies no longer sells B share mutual funds.  However, even if there are no new B shares being sold; many investors are still trapped in the overpriced funds by the surrender charges.

With the A shares, a $10,000 investment would incur an upfront sales charge of $575, meaning that $9,425 would be invested in your account.

The No Front Load Option – B Shares

As an alternative for investors who didn’t want to pay the upfront sales charge B shares were created.  While there is no upfront sales charge and the entire $10,000 is invested, the ongoing expenses of the fund are considerably higher.  Additionally you are literally trapped in the fund by the deferred sales charge which starts at 5% and declines by 1% each year until it goes away altogether in year 6.  While you can generally exchange your fund for another B share fund in the same fund family, you will get hit with the surrender charge should you sell any or all of the shares.  At the end of the surrender period the B shares are supposed to revert to the less expensive A shares.  I’ve heard of instances where B shares were not automatically moved to the A shares, it is always a good idea to read your brokerage statements.

What if I still own B shares?

If you hold B shares of any fund family I suggest the following:

  • If your fund has moved out of the surrender period and has not moved to the less expensive A shares call your financial advisor and ask why.
  • If your fund is still in the surrender period do a cost/benefit analysis to determine if moving out of the fund and buying into a less expensive (and presumably better performing) alternative would be cost effective.  Basically you want to look at the difference in the annual expenses of the B share fund vs. the alternative and determine how long it would take you to breakeven after incurring the surrender charges based on the cost savings.
  • Consider firing the financial advisor and the firm that put you into the B share in the first place.  I’ve been in this business a long time and I can’t see any reason to have put a client into a B share except greed (though I’m open to listening to other explanations).  The ongoing payments to the brokerage firm (the 12b-1 portion of the expense ratio) and the “handcuffs” placed on shareholders by the surrender charges are quite lucrative for the broker, and serve to reduce your returns.  At the very least confront the advisor and ask them why you were sold a B share in the first place.
  • I’m biased on this subject and in the interest of full disclosure I am a fee-only financial advisor and I do not accept commissions or sales loads of any kind.

As always, be sure that you understand ALL expenses and fees that you will be paying when working with a financial advisor.  What you don’t know can really reduce your investment returns.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

Photo credit:  Wikipedia

Enhanced by Zemanta

It’s National Save for Retirement Week – Let’s Party!


Until I saw something about this on Twitter I had no idea that National Save for Retirement Week even existed.  Congress


in a rare act of wisdom has designated October 21-27 for Americans to focus on saving for our retirements.

Now I’m not one for what I deem contrived holidays.  Just ask the lovely Mrs. The Chicago Financial Planner.  This past Saturday I dropped $3.99 (plus tax) on a Happy Sweetest Day helium filled balloon, the first time in our 28 year marriage that I have even acknowledged the existence of this florist contrived day. I will say her reaction was well worth the money spent.

However, any event that highlights the need to for Americans to address the impending retirement savings shortfall that many of us are facing is a good idea in my book.

A recent study by the Employee Benefit Research Institute found that even working until age 70 will not solve that lack of retirement savings for many workers.  They found that even an additional five years of work will leave about 80% of current pre-retirees short of their retirement income needs.

What can you do help ensure that you are on track to a successful retirement?  While there are no guarantees here are some tips:

Save early and often.  Starting with your first job, try to save at least 10 percent of your gross income before you get used to spending your entire paycheck. A good place to start is with your 401(k) plan at work.  Make sure at a minimum to save enough to take full advantage of any employer match.

Take appropriate investment risks.  I’ve read several articles discussing how some younger workers are quite risk averse in the wake of the 2008-09 market decline and are investing their retirement plan accounts accordingly.  This is a huge mistake.  I have a 24 year old daughter.  When she asked me how to invest her 403(b) plan account at work, I suggested that she allocate 50% to a total stock market index fund; 40% to a total international index fund; and 10% to a total bond market index fund.  I further suggested that she do this through thick and thin, set her account to auto rebalance semi-annually, and that we’d revisit her allocation in ten years.

Younger workers have the gift of time on their side and should take appropriate investment risks.  Workers who are nearer to retirement should also take age-appropriate risks.  This will vary, but in my experience most investors need a growth component in their portfolios.

Make retirement savings easy and automatic.  While some might bash 401(k) plans (in some cases deservedly so) a workplace retirement plan is an easy, painless way to save for retirement.  Unless your organization’s plan is just terrible, participate and contribute as much as you can.  The convenience of having the money come out of your paycheck automatically trumps a lot of ills in my opinion.

Start a retirement plan if you are self-employed.  Self-employment has many pluses.  A minus, however, is the need to fend for yourself in terms of employee benefits and in saving for your retirement.  There are several options here, make sure to start your retirement plan as soon as possible.  You work too hard not to.

Get a financial planWhether you do it yourself or you hire a professional, get a plan in place, review the plan annually, and adjust as needed.

What steps are you taking to ensure that you are financially prepared for retirement?

Please feel free to contact me with your retirement planning and investment questions.

Photo credit: 401(K) 2012



Enhanced by Zemanta

American Funds Growth – A Fallen Star?

falling star

My last post asked Mutual Funds – Should You Pay Extra for Active Management?  As a follow-up I am taking a look at an actively managed Large Growth fund that was once a top-flight performer, but has really slipped in recent years.

Readers of this blog may note that two of the most popular posts have dealt with the American Funds in the context of their use in 401(k) plans.  American Funds Growth remains a major holding across the 401(k) universe.

The asset base of American Funds Growth (across all share classes) is huge at just over $116 billion, but it is down considerably from its 2007 high of about $202 billion.  Still the fund remains the largest in the Large Growth category.

Let’s compare Growth’s A Share class with the Investor Share Class (the most expensive) of the Vanguard Growth Index Fund.

The A shares have a low expense ratio of 0.68%, but the Vanguard fund’s expense ratio is 0.24%.  The average fund/ETF in this category had an expense ratio of 1.22% as of June 30.  Note the A shares carry a front-end sales charge; the returns below do not reflect this.


12 months

3 years

5 years

10 years

Amer. Funds Growth






VG Growth Index






As of September 30, 2012 – courtesy of Morningstar.

A Former Star Performer

The superior performance of American Funds Growth over the ten-year period is consistent with the fund’s annual performance.  From 2002-2006 the fund outperformed the Growth Index fund during each of these years.  Further the fund ranked no worse than the top 18% of all of the funds in the Large Growth Category.

A Fall From Grace

Since 2006, the story is a different one.  American Funds Growth  has lagged the Growth Index fund in each of these years.  Further the fund has ranked in the lower half of the Large Growth category in 3 of those 5 years.  For the three years ended September 30 the fund ranks in the 74th percentile (bottom 24%) of the Large Growth category.  The fund ranks in the 68th percentile for the trailing five years and the 24th percentile for the trailing ten years.

A Closet Index Fund?

While American Funds Growth’s expenses are generally reasonable (though not for some of the share classes that are sold via the broker channel) what are you getting by paying the extra cost?  Further, the fund’s R-Squared (a measure of correlation) with the Russell 1000 Growth Index over the past three years is over 97%.

Essentially the fund has become a closet indexer with lagging performance and higher expenses.  I’m not saying American Funds Growth will never be a consistent long-term performer again, nobody can predict the future.   I respect the American Funds as an organization.  But why invest in a closest index fund when you can invest in the real thing?  If your broker or registered rep tries to convince you otherwise ask them the same question.

Please feel free to contact me with your investing and financial planning questions.

For you do-it-yourselfers, check out Morningstar.com to analyze your investments and to get a free trial for their premium services.

Morningstar Stock Fund Investment Research


Photo credit: Flickr

Enhanced by Zemanta

Choosing a Mutual Fund – Avoid These 6 Mistakes


As of July, 2012 there were 7,699 U.S. mutual funds.  As a financial professional who does this for a living I have access to a number of data bases and screening tools to help me choose the right funds for my client’s portfolios.  I often wonder how individual “do it yourself” investors choose from among the available options for their portfolios. Choosing the right mutual fund is always tough, but picking the wrong fund can have dire consequences. Here are a few mutual fund selection mistakes to avoid.

Always assume that a “brand name” translates into a good mutual fund. This fallacy has never been more evident than during the recent arbitration award against JP Morgan in connection with its brokers pushing their proprietary high-fee, low performing mutual funds over those of other fund providers.  Even excellent fund families such as Vanguard have had problem funds over the years.

Relying on lists of top funds.  There is nothing wrong with these lists per se.  However, looking in the rearview mirror constantly is not a safe way to drive, nor is it a good way to choose a mutual fund. The common disclaimer in the investment world is that “past performance is not an indication of future results.” Last year’s top fund might continue to deliver top performance, or it might not.

Ignoring a fund’s history.  At the risk of contradicting my last point, it is instructive to look at how a fund performed in both absolute terms and relative to its peers during various types of market conditions.  For example did the fund lose more than other funds of the same investment style during the market drop of 2008?  Did it also gain less than its peers during the 2009, a year of recovery in the markets?  Also look at qualitative history.  Is the same manager who compiled the fund’s stellar track record still managing the fund?

Avoid funds you’ve never heard of. The 2011 Morningstar Domestic Equity Managers of the Year are from Artisan, a smallish fund shop based in Milwaukee. These managers run the large, mid, and small-cap value funds offered by Artisan. While the award was for 2011, this team has done a solid job over the past ten years under difficult market conditions. Unfortunately for new investors (but not for existing shareholders), two of the three funds managed by this team are closed to new investors.   Selecting a mutual fund is about research and fit with your investment objectives, not about the fund ads you might see in the press.

Assume all index funds are created equal. Nothing could be further from the truth. Different funds tracking the same index can vary greatly in their expenses and structure, which will impact their performance. Additionally there may be transaction costs for some funds at various custodians which can eat into your returns, especially for smaller transactions.

Assume that the fund companies have your best interests in mind. I’m not saying that any fund company is out to hurt investors, but on the other hand they are in business to make money. A number of fund companies are publicly traded.  Their first duty is to make money for their shareholders in hopes of increasing their share price.   New fund offerings are often the result of recent market trends, good or bad. Don’t invest based on the hype fund companies might create around these new offerings. Rather, invest with your goals, risk tolerance, and your overall plan in mind.

Choosing the right mutual fund, individual stock, or ETF is difficult. Make sure you select investments based upon solid research and based upon their fit with your overall portfolio.

Please feel free to contact me with your investing and financial planning questions.

For you do-it-yourselfers, check out Morningstar.com to analyze your investments and to get a free trial for their premium services. Please check out our Resources page for more tools and services that you might find useful.

Enhanced by Zemanta

Lessons From the Groupon and Facebook IPOs


Facebook and its botched IPO is still a hot topic on CNBC and other financial media outlets.  Facebook and Groupon are the two most recent “blockbuster” IPOs and both have been miserable flops to date.

Logo of Groupon

Groupon made its debut in November of 2011 at $20 per share.  It closed at $4.24 per share on September 4, 2012.

Facebook opened trading in May of this year at $38 per share.  It closed at $17.73 per share on September 4, 2012.

While I realize hindsight is 20/20, there are several lessons an investor can draw from these recent large IPOs:

IPOs are risky investments.  As my children might say; well duh!  This goes beyond Groupon and Facebook.  There are numerous examples of IPO flops and also IPOs that have been great investments.  Google opened at $80 per share in its IPO in 2005.  The stock closed at $681.04 per share on September 4, 2012.

Hype doesn’t equal a solid investment.  Both Groupon and Facebook were the subject of intense media hype in the days and weeks leading up to their IPOs.  Don’t listen to the hype and get caught up in it.  Rather with an IPO or any investment do your homework.  In the case of an individual stock holding understand the company’s business model.  What factors will make the business prosper or flop?  Are there barriers to entry for competitors?  Clearly there have been few in the case of Groupon for example.  Even with mutual funds or other managed investments, understand who is in charge, their investment philosophy, and review how they have done in various market situations.

IPOs are a payday for many people; you are not necessarily one of those people.  In the case of both companies the IPO was a means for the senior management, early investors, key employees, and the investment bankers to realize a big payday.  This isn’t necessarily a bad thing, nor does it imply that anyone is doing anything wrong or unethical (any allegations about the Facebook IPO notwithstanding).  My point is that whether with an IPO or in dealing with a commissioned financial sales rep who is trying to sell you an annuity, understand their financial motivations.

Investing is not about the new trendy stock or fund.  If you are investing (vs. speculating or day trading) don’t worry about every new stock, fund, or ETF that comes to market.  Focus on your overall financial plan and tailor your investment strategy towards achieving the goals laid out in your plan.  If something new comes along that you conclude after careful research has a place in your portfolio, then go for it.

It isn’t different this time.  I vividly recall the late 1990s when the Wall Street Pundits claimed that the old rules didn’t apply when evaluating many tech companies.  Don’t be concerned with their lack of a balance sheet or even a credible business plan.  Fast forward to early 2000 and we know how well that turned out.  Technology has made even greater strides since then.  Businesses that we never imagined seem to pop up daily, many of them are innovative and successful.  But investing in today’s new companies is not different.  Before committing money to any investment understand why this is a good place for your money.

I am not an IPO expert and have never invested my own money or any client money in one directly.  Given my heavy use of index funds and ETFs my clients certainly have money indirectly in Facebook, Google, and perhaps other former IPOs.  Investing is about logic, common sense, and research.  This is especially true if you do your own investing.  Even if you use a financial advisor, when they suggest a new investment and/or that you sell an existing holding ask them why.  What is the logic behind their recommendation?  Why will I be better off?

Please feel free to contact me with your investment and financial planning questions.


Photo credit:  Wikipedia


Enhanced by Zemanta

Financial Advice – Have it Your Way


I spent most of today at a seminar conducted by Marie Swift, a marketing and communications guru for financial

Current "blue crescent" logo (July 1...

advisors.  Marie, assisted by her son, did a great job of educating us and stimulating the thought process.  One key takeaway is that content directed to clients and prospects should be all about them, not us the advisor.  This is also true when it comes to the delivery of financial advice.

You are the consumer of professional financial advice, why shouldn’t you have it your way?  I don’t like guacamole and our local Mexican restaurant is glad to put mine on the side so I can give to wife or son.

All too often, investors complain that they can’t or don’t receive the services they need from their financial advisor.

I’ve written often on this blog, US News, and elsewhere that everyone should have a Fee-Only Advisor who takes a comprehensive view of their situation.  That is my service model and it is the right one for my ongoing clients.  That doesn’t mean that it is the right model for your needs and your situation.

With the advent of several online advice sites there are many delivery models that you can consider.  A good place to start is to take stock of where you might need financial help.

  • Are you looking for someone to analyze your overall situation, tell you what you are doing well, and offer actionable suggestions for areas that need improvement?
  • Are you looking for someone to manage your investments using asset allocation and low cost index mutual funds/ETFs?
  • Are you seeking comprehensive ongoing wealth management advice?
  • Do you have just a few issues and would like to work with someone on an “as needed” basis?
  • Do you want to sit down face-to-face with an advisor several times per year to review your investments and overall situation?
  • Are you comfortable doing your own investing and financial planning, but would like to be able to run ideas by a professional on occasion?
  • Are you comfortable working with an advisor remotely?
  • Are you looking for a low cost online solution?
  • Are you concerned about how your advisor is compensated?  About any potential conflicts of interest that may come with their compensation structure?
  • How and how often would you like to be contacted by your advisor?

These questions and many others should be considered when looking for financial advice and the method of delivery for this advice.

Please feel free to contact me with any general questions you may have or if you are interested in learning more about the services I offer.

Enhanced by Zemanta

What Does My Fidelity Freedom Fund Invest In? – An Update


In February of 2010 I posted “What Does My Fidelity Target Date (Freedom) Fund Invest In? “ It is time to update this analysis.

Using the same methodology as the last post, I combed through each of the individual Fidelity Freedom funds and made a list of their underlying holdings. The Fi360 Toolkit which rates funds based on an 11 point criteria was used to review the underlying funds:

• Fund inception date (at least three years)

• Manager Tenure (min. 2 years)

• Minimum fund size

• 2 measures relating to fund investment style and asset composition

• Expense ratio

• 2 measurements of risk-adjusted return

• Trailing 1,3,5 year returns

Of the 23 non-money market funds used inside the Freedom Funds (all rankings as of June 30, 2011):

• One of the funds received the highest ranking of 0. This means no deficiencies, they passed all criteria.

• An additional three funds earned a score ranging from 1-25 indicating that they passed most of the criteria. This would indicate that these funds rank in the top 25% of all funds in their peer group with enough data to be ranked.

• Three funds had scores ranging from 26-50 indicating that they did not pass in a couple of areas but overall rank in the top half of their respective peer groups based upon the ranking criteria.

• Three of the funds had a ranking in the 51-74 range indicating that they were deficient in several of the criteria and overall place in the lower half of their peers with enough history to be ranked.

• One fund had a score in the bottom quartile of the ranking meaning that it was deficient in most areas and ranked in the bottom 25% of its peers. A ranking in this range indicates that strong consideration should be given to replacing such a fund.

• Twelve of the funds did not have enough history to be ranked. These funds are all Fidelity Series funds. This appears to be a new group of funds that Fidelity has designed for use in their Freedom Funds. These may ultimately prove to be good funds over time, but as an advisor I am generally loath to invest client money in new, untested funds unless there is a compelling reason to do so. In looking at the returns posted by these unranked funds, the results are middling at best.

• Noticeably absent from the underlying funds within the Freedom Funds are any of Fidelity’s low cost core index funds covering areas such as the S&P; 500; total domestic stock market; international equities; or their total bond market index fund. These are by and large solid, low cost holdings. Also absent are several top Fidelity funds such as Contra, Low-Priced Stock, and others.

Reviewing the overall performance of the 12 Freedom Funds compared to their peers in the Fi360 rankings:

• One fund received 0 the highest score available

• Three of the funds received scores ranging from 1-25 placing them in the top quartile of their peer group.

• The rest of the eight funds earned a score in the 26-50 range, placing them in the second quartile of their peer group of funds.

Note these ranking are in line with Morningstar’s evaluation of the Freedom funds as of June 30 in which they ranked this group of funds as Average. Morningstar ranks 20 Target Date families each quarter.

Target Date Funds are typically funds of funds that are managed towards the target retirement date in the fund’s name. Fidelity, for example has target date funds with dates that range from those currently retired out to the year 2050. Target Date Funds are a staple of 401(k) and other defined benefit retirement plans.

All too often a retirement plan sponsors will default to the suite of Target Date Funds offered by the platform used by the plan provider. In fact, plan sponsors need to perform the same level of due diligence on the Target Funds they offer in the plan as with any other investment choice included in the investment menu.
Target Date Funds have been marketed as a one-decision set it and forget it investment option. In my opinion, there is no such investment option.

Investors considering a Target Date Fund need to do their analysis of the fund(s) they are considering to determine if this is an appropriate investment for them. Further investors should not feel compelled to invest in the fund with the target date closest to their projected retirement date, but rather should pick the fund that best matches their investment objectives.

Please feel free to contact me with questions about Target Date Funds or to address your investment and financial planning advice needs. 

Do-it-yourselfers check out morningstar.com to analyze your investments and to get a free trial for their premium services. Check out our Resources page for links to a variety of tools and services that might be beneficial to you.

Enhanced by Zemanta

Balanced Funds – The Right Balance for You?

Common Sense on Mutual Funds: New Imperatives ...

The stock market volatility of the past several weeks, along with two substantial market declines over the past 10 years, has really brought investment diversification and balance into the spotlight.

As an investment advisor I have always practiced balance and diversification in the asset allocation strategies that I suggest for my clients.

Some investors might like the prospect of investing into a mutual fund that does this for you all in one package. Balanced mutual funds have been around for many years however they do come in many “flavors.”

Morningstar does not list a category entitled “Balanced Funds.” Rather there are several that encompass balanced funds:

• Conservative Allocation
• Moderate Allocation
• Aggressive Allocation

Additionally, depending upon your definition of a balanced fund, one could include the nine categories for Target Date funds as well.

This raises a key point, picking a balanced fund is not an easy task. Just like any mutual fund, investors need to review the fund’s objectives, understand the allocation and types of investment vehicles the fund will use, review the expense ratio, etc.

Morningstar’s Moderate Allocation category consists of funds that generally invest from 50% – 70% into equities, with the rest in bonds and cash. This is closest to the traditional 60/40 allocation I generally associate with a balanced fund. In this category, Morningstar has six Analyst Picks. A few collective observations regarding these six funds:

• Returns for calendar 2008 ranged from -18.41% to -33.57%. The S&P; 500 index lost 37% that year.

• Returns for the past four weeks (ending August 12, 2011) have ranged from -4.89% to -9.46%. The S&P; 500 lost 10.11% over the same period. Note the same funds were at the high and low ends of this range over both time periods.

• Based upon the most recent data (as of June 30, 2011) from Morningstar, the allocation to equities ranged from 46.45% to 73.29%. Again the fund with the lowest loss over both periods above had the lowest equity allocation and the fund with the worst loss the highest.

• Over the 10 year period ending July 31, 2011, the six funds had average annual returns ranging from 5.08% to 9.27%. This compares the S&P; 500 which had an average annual return of 2.61% over this time period.

What does this mean to you as an investor? It means that balanced funds require review and analysis before purchasing and monitoring and evaluation while you own them.

One key point, assuming that a balanced fund is not your only investment, it is critical to look at the fund’s allocation to see how it fits with the rest of your holdings. Would the addition of a balanced fund cause your portfolio to be under or over weighted in stocks or fixed income? Is there undo overlap in the underlying holdings?

As with any mutual fund you want to look at who is in charge. Are they the folks who have accounted for the fund’s track record over a number of years? In short, this is no different than the selection of any other mutual fund or investment holding.

Regardless of whether you go the balanced fund route or create a balanced, diversified allocation from the individual holdings in your portfolio, the results noted above over the past 10 years at least speak to the benefits of diversification. While a balanced approach certainly will not always provide a better return than equities, you will generally find the road to be a bit less bumpy in terms of portfolio volatility.

Please feel free to contact me if I can be of help in reviewing your portfolio. 

Enhanced by Zemanta