Home Adviser Fund Update Vanguard’s New Fund Published September 27, 2013 Fidelity Adjusts Target Funds’ Sights Fidelity announced this week that it was overhauling its Freedom funds, which are designed to offer a one-stop retirement saving and spending solution for investors, in an attempt to provide better long-term performance. Going forward, the funds will feature a heavier emphasis on stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. than bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates., and will delay the “glide path” from equity-heavy to bond-heavy allocations until later in life. The changes reflect Fidelity’s best thinking on the future of the markets and investing for retirement—in short, the firm believes that planning for retirement will become more difficult, going so far as to say that investors may need to reset their expectations for income in retirement or hold off on retiring until they are older. Fidelity also recommends that younger investors start a retirement account as soon as possible and that all investors contribute as much as possible—sound advice. These findings are based on extensive research into several areas, from savings, spending and life expectancy trends among its investors, to expected returns for various asset classes, to running computer simulations of how different portfolio configurations might perform over time. While the firm believes that its ultimate target of a 20%/80% split between equitiesThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. and fixed-income and cash is still appropriate, it thinks that returns for bonds and U.S. stocks over the next 20 years will be lower than their historical averages. In the end, Fidelity determined that it needed to rework its target-date funds to help investors achieve better outcomes (i.e., not outliving their savings). As mentioned above, the first part of the adjustment is to increase exposure to stocks, both domestic and international, while reducing exposure to fixed-income holdings, particularly shorter-duration bonds and cash. The example Fidelity gave was its Freedom 2020 fund (designed for investors who plan to retire in the year 2020), which will move from a 53% allocation to equities (39% domestic, 14% foreign), 39% in bonds and 8% in cash to 61% equities (43% domestic, 18% foreign), 32% in bonds and 7% in cash. The firm has also changed when and how its target date funds’ allocations will begin to shift to their final stages. The Freedom funds, which use an investor’s expected retirement year to determine allocations, will start with a 90% equityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. and 10% fixed-income split and stay there until about age 45 (approximately 20–25 years from retirement), when they will begin to increase exposure to fixed income and reduce exposure to stocks. Fidelity says age 84 is the ideal target age for the final, more conservative allocation to go into effect (assuming a life expectancy of 93 years). It might seem surprising that Fidelity settled on 84 years old, when presumably investors will be a decade or more into retirement, as the final allocation stop. This is where the retirement savings element comes into play—Fidelity says that most investors do not contribute enough to their retirement accounts to justify moving to a more conservative strategy any earlier, and the greater return potential of a heavier weight to equities is needed to ensure protection against inflation and a sufficient level of income to last through retirement. The changes that Fidelity is making reflect the shifting nature of saving for retirement, given longer life expectancies and the current low yieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. on fixed-income investments and cash. While we believe that custom, diversified portfolios of active managers serve investors better than one-size-fits-all “solutions,” Fidelity’s research is intriguing and reflects the evolution of thought on how investors should plan for the future. Vanguard Aims at VolatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. Following a growing trend in the mutual fund and ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. industry, Vanguard has announced its intention to open a low volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. fund, Vanguard Global Minimum Volatility, which it says should be available at some point before the end of 2013. Funds like this are designed to weather market downturns with fewer losses, but also will not typically gain as much as the market when it is humming along. Vanguard’s fund will be focused on stocks, investing about half of its assets in the U.S. and the other half in international markets. It will also hedge against foreign currencies in an attempt to diminish the potential volatility of its overseas investments. Global Minimum Volatility is slated to be managed by a team of three managers from Vanguard’s in-house EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Investment Group, James Troyer, James Stetler and Michael Roach. The trio co-manages Vanguard’s Strategic Equity and Strategic Small-Cap Equity funds, and also manages a portion of assets of Vanguard’s Energy, Equity Income, Explorer, Growth and Income, Market Neutral, Morgan Growth, U.S. Value and Windsor II funds. They represent Vanguard’s go-to crew for quantitatively managed equity portfolios. The new fund is currently planned to have Investor and Admiral shares, which will charge 0.30% and 0.20% in expenses, respectively. The minimum initial investment for the Investor shares will be $3,000; for the Admiral shares, it will be $50,000. As a category, low volatility funds have really only begun to hit the market over the last two years, so their efficacy in avoiding a big drop in the markets, like we saw during the financial crisis from 2007 to 2009 or when the tech market bubble burst in 2000, has yet to be determined. There is certainly an appetite for this kind of investment, as the ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. in the space have already garnered $11 billion in assets. It will be interesting to see the reception for Vanguard’s entry to the space and how it stacks up to its competitors. About Adviser Investments Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFs, fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., foundations and institutions meet their investment goals. Our minimum account size is $350,000. 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