Christine Benz's Favorite Funds for Accumulators

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Our director of personal finance, Christine Benz, has created saver portfolios for accumulators. We're going to look at what some of her favorite holdings are for investors getting ready for retirement.

Christine, thanks for joining me.

Christine Benz: Jeremy, great to be here.

Glaser: Let's start by talking about these saver portfolios. How are they different from the kind of your bucket retirement portfolios that I know we talk about quite a bit?

Benz: Right. The bucket portfolios are designed for people who are actively drawing upon their portfolios for living expenses in retirement. So, they are for people who are already retired. The saver portfolios are for people who are still in accumulation mode. Some of them are for people who are many, many years from retirement, so people who are just new to job market, just beginning their investing careers. And then the later saver portfolios are for people who are getting close to retirement. So, they have more conservative asset allocations, but they still have hefty allocations to equities because even the person who is 55 still is investing and saving for what could be a 35 or 40-year time horizon. So, they do have ample equity allocations for every life stage.

Glaser: Let's start with those equity holdings then. What are some of your favorite core U.S. equity holdings?

Benz: So, we have really two main core saver portfolios. The first set are mutual fund portfolios, and there I have you some actively managed funds, because we do think investors can do well with certain actively managed funds. And so, my core equity positions are Primecap Odyssey Growth, which is the only open fund from the Primecap family of funds. I also have a position in Oakmark fund, which is a value-oriented, kind of counterpart to the Primecap fund. So, it's, what we think, a terrific value manager should be doing. And I also have a smaller position in Vanguard Extended Market Index. I didn't want to have a ton of small holdings in these portfolios. So, the Extended Market Index gives us exposure to the broad mid- and small-cap markets in a single shot. So, that's what I've got in the mutual fund saver portfolios for U.S. equity holdings.

With the ETF portfolios for savers, we kept the equity exposure, the U.S. equity exposure, pretty simple. So, we have the lion's share of the equity portfolios in Vanguard Total Stock Market Index and then we also have a smaller position in Vanguard Small-Cap Value Index. So, the idea is to capitalize on what has historically been the long-term outperformance of small-cap value stocks. We don't have a huge position in that holding in any of the portfolios, but it is there as a little bit of a kicker alongside the total market exposure.

Glaser: How about international equity?

Benz: So, on the core mutual fund portfolios we have Vanguard Total International Stock Market Index. That's the core foreign stock position. But I also have a smaller position in T. Rowe Price International Discovery. That's an actively managed fund that invests in small- and mid-cap stocks overseas. So, those are the two positions within the core mutual fund saver portfolios.

Within the ETF portfolios we have a position in Vanguard Developed Markets ETF as well as well Vanguard FTSE Emerging Markets ETF. And the idea there is that an investor who holds both of those positions and a smaller position in the Emerging Markets ETF could do some rebalancing. So, if emerging markets have been particularly out of favor and the Developed Markets Index has done better, an investor could strip back Developed Markets and add it to Emerging, because that's one thing we see with emerging markets is that they periodically go through these troughs, and that tends to be a really good time to add to those positions, when they are depressed. So, that's the idea behind having those two positions.

Glaser: Generally, these portfolios are fairly aggressive, but you still have a bond allocation. What are some of your favorite funds to get exposure to the fixed-income market?

Benz: Well, for a lot of the saver portfolios for investors who have many years until retirement, we just have one core fixed-income position. And the holding that I've used in the core mutual fund portfolios is MetWest Total Return Bond. It's kind of a go-anywhere type of portfolio. So, that's the core fixed-income holding there. And then for the portfolios for investors who are getting a little bit closer to retirement, we add in positions in Vanguard Inflation-Protected Securities, and I have used a little bit of Fidelity Short-Term Bond, which is a high-quality short-term bond portfolio. But we really don't add any nuance to the fixed-income allocation until someone is 10 or 15 years to retirement. Then we begin adding a few more distinct holdings within the fixed-income space.

In the ETF portfolios, we made a little switch there recently after consulting with our team of passive research specialists here. We had a Barclays Aggregate Tracker in place in the ETF portfolios in the past. We swapped in iShares Core Total U.S. Dollar Bond Market ETF in its place. And the idea there is that with that fund we're picking up a little bit of high-yield exposure. So, it's a more inclusive fixed-income holding. And as with the saver portfolios geared toward people who are getting close to retirement, we begin adding some additional exposure. So, for the saver portfolios for people who are 10 or 15 years from retirement, we have positions in Vanguard Short-Term Bond Index as well as Vanguard Short-Term Inflation-Protected Securities.

Glaser: You've created some tax-efficient versions of these portfolios as well. Why did you create those?

Benz: Well, the basic idea is that many investors will have maxed out their 401(k) allocations, they may have maxed out their IRA contributions. The idea with the tax-efficient portfolios is that they are appropriate for people's taxable accounts, their nonretirement accounts. So, within these portfolios we have focused on tax-efficient investments.

With the core tax-efficient portfolios I have used tax-managed mutual funds, which are actively managed to reduce income and capital gains distributions. I have used Vanguard's tax-managed funds there. But I have also used Fidelity's Municipal Bond funds. I know our analyst team does believe that Fidelity's muni bond operation is second to none. So, we've paired those two together. But I've also created tax-efficient portfolios for investors who are investing within certain fund families, and there I've kind of mixed and matched. I haven't stuck exclusively with tax-managed equity funds. I've used some exchange-traded funds, I've used some broad-market index funds for the equity exposure, but I've typically stuck with municipal bonds for the fixed-income exposures.

Glaser: Christine, thanks for all these great ideas today.

Benz: Thank you, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.