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M*'s Christine Benz; 5 Fund Types I'd Like to See More Of
FYI: The mutual fund and ETF industry is awash with new investment types, but there's a shortage of solution-based funds that address real investors' needs, says Morningstar's Christine Benz. Regards, Ted http://www.morningstar.com/Cover/videoCenter.aspx?id=665559
CB mentioned tax managed funds. USBLX holds both tax free munis and the S&P Index both allocated at about 50% each. What I don't like about the fund is the 1% fee it charges. If I were to create a tax managed portfolio myself I would own these two sectors separately and attempt to learn the tax management techniques myself.
Also, I would like to see more "target death funds". Retiring today with 100% of my portfolio in a heavily laden bond allocation (in say a 2015 target retirement fund) might not get you into the grave as the last check bounces.
Investors and especially retirees in target date funds should ladder these out to their expected "date of death". I would own these in 5 year increments.
In this way, there is always a portion of a retirees portfolio available for income as they reach each of these 5 year milestones while at the same time a portion is still dedicated to continued potential growth out to the gravestone.
IMHO, target date funds are one of the most misunderstood/misused categories of funds around. Their fundamental conceit is that they manage the bulk of your portfolio for you, based on "typical" progression through time. Though one would likely set aside funds for specific future purchases (e.g. that "trip around the world" you've always wanted to take), most of one's holdings should be in the target fund.
Doing otherwise defeats the purpose of the fund - to deal with asset allocation as "time marches on". If you don't like a fund's flight path, don't mix and match to get your own - you'll only have to monitor and tweak it as each fund adjusts at a different rate. Rather than simplifying the task of managing your portfolio, you can wind up complicating it.
TRP recognizes that not all glide paths, or people's needs, are created equal. So it offers two separate families of target date funds, Retirement Funds (with a higher percentage in equity), and Target Retirement Funds.
CB is asking for target date tax-managed funds, not asset allocation tax-managed funds (of which VTMFX - Vanguard Tax Managed Balanced Fund is another example). With respect to USBLX, it appears to have a unique approach to fixing its stock/bond ratio. While it happens to be 50/50 now, I expect it to tilt toward stock as interest rates rise. This is because it is supposed to generate at least half its income as tax-free income. As the income generated from tax-free bonds increases (due to rate increases) it will have the flexibility to allocate a greater percentage of the portfolio to equity.
Since I don't use target date funds (I feel I can deal with my own asset allocation), I'm not really looking for a target date tax-managed fund. The suggestion that holds the most appeal for me is the managed payout fund. That's an attempt by fund companies to offer something between an annuity (where you pay up front for a guaranteed stream of income) and funds where you're on your own in managing your income stream. I'd like to see a lot more experience with these funds before buying one, but I think it's an interesting approach.
Comments
Also, I would like to see more "target death funds". Retiring today with 100% of my portfolio in a heavily laden bond allocation (in say a 2015 target retirement fund) might not get you into the grave as the last check bounces.
Investors and especially retirees in target date funds should ladder these out to their expected "date of death". I would own these in 5 year increments.
In this way, there is always a portion of a retirees portfolio available for income as they reach each of these 5 year milestones while at the same time a portion is still dedicated to continued potential growth out to the gravestone.
Doing otherwise defeats the purpose of the fund - to deal with asset allocation as "time marches on". If you don't like a fund's flight path, don't mix and match to get your own - you'll only have to monitor and tweak it as each fund adjusts at a different rate. Rather than simplifying the task of managing your portfolio, you can wind up complicating it.
TRP recognizes that not all glide paths, or people's needs, are created equal. So it offers two separate families of target date funds, Retirement Funds (with a higher percentage in equity), and Target Retirement Funds.
CB is asking for target date tax-managed funds, not asset allocation tax-managed funds (of which VTMFX - Vanguard Tax Managed Balanced Fund is another example). With respect to USBLX, it appears to have a unique approach to fixing its stock/bond ratio. While it happens to be 50/50 now, I expect it to tilt toward stock as interest rates rise. This is because it is supposed to generate at least half its income as tax-free income. As the income generated from tax-free bonds increases (due to rate increases) it will have the flexibility to allocate a greater percentage of the portfolio to equity.
Since I don't use target date funds (I feel I can deal with my own asset allocation), I'm not really looking for a target date tax-managed fund. The suggestion that holds the most appeal for me is the managed payout fund. That's an attempt by fund companies to offer something between an annuity (where you pay up front for a guaranteed stream of income) and funds where you're on your own in managing your income stream. I'd like to see a lot more experience with these funds before buying one, but I think it's an interesting approach.