How Well Did the Retirement Saver Portfolios Perform in 2020?

In early 2020, after both stocks and bonds had enjoyed a terrific year in 2019, I wrote that investors shouldn't get accustomed to such strong performance from the markets.

But despite a raging pandemic and the potential for significant election-related volatility, stocks and bonds delivered again in 2020. As a result, each of the Retirement Saver model portfolios, which are geared toward people accumulating assets for retirement, notched gains of between 12% and 15%.

At the same time, 2020 was a year in which a very vanilla portfolio consisting of a total market index fund and a Bloomberg Barclays U.S. Aggregate Bond tracker would have been hard to beat. All six of the portfolios--even the Aggressive portfolios, with 95% equity exposure--lost out to Vanguard Balanced Index's VBIAX 16% gain last year. That fund consists of 60% total stock market (the CRSP U.S. Total Stock Market Index) and 40% Bloomberg Barclays U.S. Aggregate Float-Adjusted Bond Index.

The model portfolios' foreign-stock exposure detracted from their performance relative to Vanguard Balanced Index, which focuses exclusively on U.S. stocks and bonds. In addition, the portfolios all suffered for their exposure to value stocks, which badly lagged growth names for much of the year.

The mutual fund and exchange-traded fund portfolios are designed to have similar risk profiles; for example, the asset allocation of the Moderate Mutual Fund portfolio is roughly in line with that of the Moderate ETF portfolio. Nonetheless, two of the three ETF portfolios (the Conservative and Moderate ones) outperformed their mutual fund counterparts last year by small margins. The Aggressive mutual fund portfolio managed to beat its ETF counterpart thanks to its 15% weighting in Vanguard Extended Market Index, which gained more than 30% last year.

Aggressive Mutual Fund Saver Portfolio 20% Primecap Odyssey Growth POGRX 20% Oakmark Fund OAKMX 15% Vanguard Extended Market Index VEXAX 33% Vanguard Total International Stock Index VTIAX 7% Oakmark International Small Cap OAKEX 5% Metropolitan West Total Return Bond MWTRX

2020 Return: 15.28%

Moderate Mutual Fund Saver Portfolio 15% Primecap Odyssey Growth 15% Oakmark Fund 15% Vanguard Dividend Appreciation Index VDADX 10% Vanguard Extended Market Index 21% Vanguard Total International Stock Index 5% Oakmark International Small Cap 19% Metropolitan West Total Return Bond

2020 Return: 14.28%

Conservative Mutual Fund Saver Portfolio 10% Primecap Odyssey Growth 10% Oakmark Fund 10% Vanguard Dividend Appreciation Index 7% Vanguard Extended Market Index 10% Vanguard Total International Stock Index 4% Oakmark International Small Cap 30% Metropolitan West Total Return Bond 7% Fidelity Short-Term Bond FSHBX 12% Vanguard Short-Term Inflation-Protected Securities Index VTAPX

2020 Return: 11.59%

Performance Recap: All of the stock funds in the portfolio delivered strong gains in absolute terms in 2020, though three of the four domestic-equity funds in the portfolios lagged the S&P 500 last year. Despite its placement in the large-growth Morningstar Category, Primecap Odyssey Growth isn't populated with giant positions in the usual suspects, like Apple AAPL. Rather, the portfolio's idiosyncratic contrarian-growth portfolio can leave it out of step with its rivals in strong market rallies. As a result, the fund, which has a Morningstar Analyst Rating of Gold, posted its second-straight year near the lower echelons of the category. Meanwhile, Oakmark Fund struggled (in relative terms) due to its value bias and emphasis on financials, which badly lagged the broad market. Vanguard Dividend Appreciation Index also underperformed the S&P and its large-blend peers; its light weighting in technology stocks was a key culprit. On the plus side, Vanguard Extended Market Index, which supplies small- and mid-cap exposure to all of the portfolios, enjoyed a stunning year. It benefited from its holdings in many of 2020's "it" stocks, including Tesla TSLA, Zoom Video Communications ZM, and Moderna MRNA.

On the fixed-income side, core bond holding Metropolitan West Total Return Bond managed a solid campaign, outperforming its intermediate-term core-plus category peers and the Bloomberg Barclays U.S. Aggregate Bond Index by sizable margins. Morningstar's associate director of fixed-income strategies Brian Moriarty notes that the fund held up better than its peers in the first-quarter market sell-off thanks to its exposure to government bonds, but that the managers then added to agency mortgage-backed bonds and investment-grade corporates on weakness during the swoon. As interest rates trended down last year, short-term bonds, which are included in the Conservative portfolio, didn't benefit as much from declining yields.

Portfolio Changes: None. However, given the underperformance of small-value and international stocks, investors who track this or a similar portfolio mix might consider rebalancing to boost their positions in those names.

Aggressive ETF Saver Portfolio 50% Vanguard Total Stock Market ETF VTI 10% Vanguard Small-Cap Value ETF VBR 30% Vanguard FTSE Developed Markets ETF VEA 5% Vanguard FTSE Emerging Markets ETF VWO 5% iShares Core Total USD Bond Market ETF IUSB

2020 Return: 15.16%

Moderate ETF Saver Portfolio 47% Vanguard Total Stock Market ETF 8% Vanguard Small-Cap Value ETF 20% Vanguard FTSE Developed Markets ETF 5% Vanguard FTSE Emerging Markets ETF 20% iShares Core Total USD Bond Market ETF

2020 Return: 14.59%

Conservative ETF Saver Portfolio 33% Vanguard Total Stock Market ETF 5% Vanguard Small-Cap Value ETF 10% Vanguard FTSE Developed Markets ETF 4% Vanguard FTSE Emerging Markets ETF 30% iShares Core Total USD Bond Market ETF 11% Vanguard Short-Term Inflation-Protected Securities ETF VTIP 7% Vanguard Short-Term Bond ETF BSV

2020 Return: 11.97%

Performance Recap: The Moderate and Conservative ETF portfolios performed better than their mutual fund counterparts, as noted above. Vanguard Total Stock Market ETF, the largest holding in all three portfolios, performed better than almost all of the domestic-equity funds in the mutual fund portfolios, save for Vanguard Extended Market Index. Small-cap value was the worst-performing square of the Morningstar Style Box last year, so the portfolio's position in Vanguard Small-Cap Value ETF was a hindrance.

Portfolio Changes: None. However, given the underperformance of small-value and international stocks, investors who track this or a similar portfolio mix might consider rebalancing to boost their positions in those names.