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Investing Insights: Strategies for Women and Risk Exposure

We analyze Johnson Controls and BlackRock and offer a short-term bond fund recommendation on this week's episode.

Editor's note: We are presenting Morningstar's Investing Insights podcast here. You can subscribe for free on iTunes.


Christine Benz: Hi, I'm Christine Benz for We are nearly 10 years into the current market expansion, and Morningstar's director of global ETF research, Ben Johnson, thinks it's a good time for investors to revisit their portfolios' risk exposures. He is here with me today to share some specific strategies for doing that.

Ben, thank you so much for being here.

Ben Johnson: Thanks for having me, Christine.

Benz: Ben, in the latest issue of ETFInvestor, you spent a lot of time talking about risk. You noted that you think it's a good time for investors to check up on their portfolios' risk exposures. We have seen a little bit of volatility in the market so far here in 2018. Why do you think it is an opportune time to be looking at risks that might be lurking in portfolios?

Johnson: Christine, quite simply put, it makes sense to repair your roof while the sun is still shining, before it starts raining. What we have seen is that conditions in the market, the market climate, has been generally quite sunny since we touched the very bottom of the market in March of 2009 in the midst of the global financial crisis.

I recently took a look at some data, and I graphed the trailing three-year standard deviation of returns for the S&P 500 going all the way back to March of 1939. What we see is that, at present, we are in the third longest streak ever of below average volatility in the U.S. equity market. The next longest streak ended in May of 1962. This period of relative calm is unprecedented in most investors' lifetimes. There's no better time now while the sun is still out, before clouds are beginning to form, to take a look at your roof and make sure that there's no holes that you need to be patching.

Benz: Because these periods of relatively placid market performance don't last forever, that we inevitably will see some period of volatility.

Johnson: Do not last forever. Absolutely not.

Benz: In the issue of ETFInvestor you laid out some specific things that investors should be thinking about when thinking about troubleshooting risk in their portfolios. Top of the list was asset class exposures, checking up on that. Why is that so important?

Johnson: Asset allocation is a huge driver of your long-term returns. It also is a way to optimize for good behavior, which I would argue matters more than anything else. Matters more than asset allocation, matters more than security selection. If you were to just have a simple 60/40 portfolio, 60% invested in U.S. equities, say, through the Vanguard Total Stock Market Index Fund, and 40% invested in U.S. bonds through the Vanguard Total Bond Market Index Fund, take that portfolio, invest in that portfolio in March of 2009 at the very bottom of the market, and fast-forward to today. What you would see is, if you left that unattended, if you did not rebalance, you would have 84% of your assets invested in U.S. stocks.

Now, this is an extreme scenario. What I would guess is that many investors have been enjoying what have been very favorable conditions in the stock markets, that they have been happy to be invested in stocks, and in many cases, overweight stocks. Now, I would argue, is a fantastic time to revisit your asset allocation and have a gut check and understand whether or not you have too much equity risk in your portfolio, especially given how long in the tooth the current bull market has become.

Benz: Well, that's obviously a huge topic--how to set the right asset allocation. In terms of some coaching that you can provide on how investors should approach that question, where should they look for advice about how to set their asset allocation?

Johnson: I think you need to look externally. You need to sort of look at the data. You need to consult with a professional, if you need to phone a friend, if you need that help. You need to look internally as well and understand what is your willingness, what is your ability to tolerate various levels of risk, not just today, again, while the sun is still shining, but is your asset allocation today something you will be comfortable with should markets take a turn for the worse.

Benz: Would it be the kind of thing that you could live with and hang tight with?

Johnson: Absolutely.

Benz: Another thing you wrote about is, looking at your issue selection, looking at your security selection and seeing if there are some ways that you might shade things over to less volatile securities within both equities as well as bonds. Let's start with equities. If I'm looking at my equity portfolio today and I'm thinking, well, I still want to maintain maybe an equity-heavy posture, but I want to make sure that I'm not in the most volatile stocks. How can I think about doing that?

Johnson: Well, fortunately for investors there are a wide variety of tools in the fund's tool kit and in the ETF tool kit in particular. So, an example in the equity space would be the iShares Edge MSCI Minimum Volatility USA ETF. The ticker for that fund is USMV. That fund has a Morningstar Analyst Rating of Silver. What that fund does is it looks to build a portfolio of U.S. stocks that is going to be inherently less volatile. It's not going to draw down as deeply. You are not going to participate in bear markets to the extent you would if you just owned a broad U.S. equity index fund. By way of paying for that, if you will, you are not going to participate in the upside as much as you would otherwise as well. This is an interesting fund for investors who want to maintain an equity allocation but don't necessarily want to have a scenario where they are participating fully in the downside in the event of any downdraft in the stock markets in the United States.

Benz: How about on the fixed-income side? You mentioned to me before we got rolling here that there has been just this torrent of assets into ultrashort-term bonds. Is that the way to do it or do you think maybe investors are overdoing the managing duration risk? How should investors approach that?

Johnson: I think it's a way to do it. People have been worried about rising rates as long as the bull market in equities has been going on now. The Fed looks keen to continue to raise rates at least into the back half of this year. In the short term, people are very concerned about this, and this has manifest itself on a year-to-date basis in the form of $14.5 billion of investors' money going into ETFs in the Morningstar Ultra Short Term Bond category. People are worried about interest rate risk, whether rightly or wrongly. Certainly, in the immediate term, rising rates will negatively impact the value of many bonds.

Over the long term, I would argue that these fears are somewhat overblown, especially if you are someone who is currently in retirement and spending your way through retirement. Rising rates are a long-term good thing, because earning 1.5% on your savings is far inferior than earning 2.5% or 3.5% or what have you. In the near term, I think, investors are probably in many cases overreacting to rising rate fears. In the long-term, I think, investors, especially those spending their way through retirement, should see this as a positive trend.

Benz: I might want to avoid the very longest-duration bonds, given what we suspect could happen to interest rates in the years to come. But the core intermediate-term and maybe short-term products, those still make sense as a good bulwark in my portfolio against equity risk.

Johnson: Absolutely. That's absolutely the case. The further out the curve you go, the more risk you are going to take. If you get all the way out on the curve, you are going to see a level of volatility that's going to look like stocklike volatility.

Benz: Ben, you have mentioned a couple of times the sort of behavioral risk, the chance that if my portfolio is too volatile that I will do something really rash with it, maybe switch everything to cash and then be sitting there watching the market start to creep up. Do you have any guidance on how investors can manage their own behavioral risks? It sounds like kind of addressing at the portfolio level the volatility is one way to do it. Any other tips that you can provide?

Johnson: The greatest risk we all face is the risk that we look at in the mirror every morning and the risk manifesting itself in making the wrong decisions at absolutely at the wrong time. The best advice I could possibly offer would be to manage the first two items we've discussed--that has to do with asset allocation and security and fund selection for the best behavioral outcome possible. Find a plan and asset allocation, find a set of funds or individual securities that you are most likely to stick with through thick and through thin, because ultimately, it's the time in the market that matters moreso than anything and far less so and that's far easier to control than how you might try to time various market exposures or when you might try to dial up or dial down the risk of either your asset allocation or the funds and securities that are within your portfolio.

Benz: Always great to hear your insights, Ben. Thank you so much for being here.

Johnson: Thank you for having me.

Benz: Thanks for watching. I'm Christine Benz for


Christine Benz: Hi, I'm Christine Benz for Many women are playing catch-up with their retirement savings. Joining me to discuss some strategies to help women bridge the retirement funding shortfall is Nancy Coutu. She is a principal with Money Managers Limited in the Chicago suburbs.

Nancy, thank you so much for being here.

Nancy Coutu: Thank you for having me, Christine.

Benz: You focus a lot on educating women about investing. Let's start by talking about some of the challenges that women face as investors. What makes them different from their male counterparts? There's a lot that's the same, but let's talk about some of the key challenges and what makes them different.

Coutu: Well, for one thing, women make $0.77 on the $1 that the man makes. So, right out of the box, she is making less money, which means she will have less benefits, which means she has less to save and also, she is going to live longer. She has got a combination of factors that has to be addressed personally to her.

Benz: I want to talk about when you are meeting with women, and you advise clients on their portfolios and on their investment programs, if you sit down with a woman and say, she is looking at her retirement plan and she is undersaved related to where she should be at that life stage, how would you suggest that she make up the shortfall? Let's think of maybe a woman in her 50s. What are some of the key levers that she can pull at that life stage?

Coutu: That's more common than you would think, because women were caregivers. A woman will start work, then she will stop to raise her children, then she goes back to work, then she is maybe staying home or taking off time to care for parents or an ailing spouse. As a result, she has not had a lot of time and extra resources to save. She is kind of behind often.

And if she has got a 10-year window, there's a lot of things that can really be done. It starts with, you've got to itemize what is the cost of living right now. As a certified financial planner my responsibility is to first go through her expenses. What is it  costing? I split expenses between required and desired. First, it's how much do we need to meet the required expenses--mortgage, real estate taxes, insurance, food--and then what does she want retirement to look like? Does she want to stay in her home? Does she want to move somewhere else? If she moves, is it going to be more expensive, less expensive lifestyle?

What types of things does she desire to do in retirement? Again, is it travel, is it helping her children financially, maybe grandchildren with college? We go through all of what she wants retirement to look like and then we go back to what are her resources: How much she is making right now versus her expenses? Is there a little extra there that she could be saving and we allocate that to savings, sometimes more aggressive savings at this point because we only have 10 years. Also, she needs to know how is she allocated. Women tend to be more conservative investors than men. They might have had and/or they are way lopsided. They either have it all at risk or none at risk. You need a balance, and it's about looking at the allocation and making recommendations on that. Under our new tax reform, there's really an opportunity here; 90% of the population will have a tax decrease this year. It's about going back and looking at what her withholding is set up at work and if she could change that to get a couple of hundred dollars more a month in cash flow, ultimately to save that money. That's our starting point.

Benz: To step up savings. You mentioned the asset allocation question. If you were to look at it in a vacuum without any behavioral factors in the mix, you might think, well, longer life expectancy, that might call for a higher weighting in stocks. Would you say that you do tend to recommend higher equity weightings for women than their male counterparts or does it completely depend?

Coutu: It has nothing to do at that point with sex; it has to do with time and your competency in investing. The most important is, I use the rule of 100. So, male/female doesn't make any difference: It's 100 minus your age. The difference is the maximum you should have exposed to risk. Risk is something going up and down. It could be a bond portfolio. People perceive that as safe and it's not. A stock portfolio, and most people in their 401(k) today because the plan doesn't have anything that's safer to invest in, it's 100% exposed to risk. Sometimes that's our starting point. I'll look at her 401(k) statement and see on a scale from 1 to 10, she is a 2 in terms of conservative, but she has 100% of her retirement savings at risk. It's about balancing that. It's 100 minus your age. The difference is the maximum at risk. If she is 50 years old, the maximum should be 50% at risk. And if it's 90%, we have some work to do to balance that out.

Benz: You mentioned though, bonds, bond funds. We have potentially some potential for principal-related volatility, some risk there as well. How do you sort of navigate that situation, the fact that we have rising interest rates that are putting some downward pressure on bond prices?

Coutu: Again, we first start with the balance formula, the 100 minus the age. But then, we go outside of the plan, because the plan itself won't have anything other than bond funds that will be volatile. There might be other investments they need to look at outside of the plan that have fixed rates of return that can't go down in a bad market, because you did safety in that portfolio. Safer investments don't go down in value. They can only go up. And there are several. The interest rates, of course, are fixed and as a result lower potential to make long-term money, but they also have a potential to never go down. And the next best thing to making money is not losing it.

Benz: What are you talking about in that category? Are you talking about cash or stable value or …?

Coutu: It could be cash, it could be money markets, it could be long-term Treasuries, individual Treasuries as opposed to a bond fund. It could be fixed annuities, fixed index annuities. Not variables, because variables you are back in the market. But certainly, things that are conservative in structure will give you a better than average rate of return if it was left in money market and ideally no fees, no management fees.

Benz: We talked about looking at the budget, making sure that the savings rate is adequate. We talked about asset allocation. Let's talk about Social Security planning and what kind of counsel you give women on timing their Social Security claiming decisions? Does that greater longevity call for postponing Social Security filing? Or how do you come down on that question?

Coutu: We can strategize around Social Security in a variety of different ways, which is a good thing. Number-one is, if she is single, was she married? If she was married and if she was married for 10 years or longer to the person, whether they are alive or deceased, she has a right to claim his Social Security benefit which she will get half of it, but she can take, as a strategy, she can take half of his, postpone taking her own benefit, let her own benefit accumulate after her full retirement age, so it's compounding at 8% a year at least. Then switching from the spousal benefit over to her own benefit at age 70. So, she ultimately ends up with substantially more in payout than she would have if she had to take her own, either early, before her full retirement age or at retirement age. That's one example. A lot of people don't know that.

There's also a widow's benefit you can do the same with; you can take your widow's half benefit and then switch to your own later on. But it's strategizing. Of course, maybe you have to work longer to get a bigger benefit. A lot of times again, women don't even have their 40 quarters in because they were off and on work.

Benz: Right. That working longer issue has, kind of, bubbled up. People see it as a powerful lever for making up for retirement planning shortfalls. Do you encounter clients who intend to work longer, and are they successful in being able to do that? Or again, does it completely depend?

Coutu: A lot of people are going back to work. A lot of people left work, they found they couldn't fill their day with enough activities and are going back to work. Also, it's kind of interesting, the demographics of the workforce. Employers are starting to look for baby boomers to employ instead of maybe the younger generation coming out of college. There are new and different opportunities for someone 50 and older now that weren't there even 10 years ago. That's kind of exciting.

Benz: Finally, let's talk about long-term care planning, because you mentioned, Nancy that women tend to be caregivers oftentimes for parents and then perhaps their spouses. But if their husband predeceases them, there is no one to care for them oftentimes. How do you counsel clients on approaching the long-term care decision? Obviously, there are a lot of factors here. We've seen long-term care premiums go through the roof over the past decade. How do you encourage women or counsel women on navigating this space?

Coutu: Women are going to live longer. And because they were caregivers, it could have also affected their health. Yheir chance of becoming debilitated whereby they can't do two or more of their daily activities is far greater, actually, a risk than a man because of that caregiving background and what it's done to their health personally. A woman should know that ahead of time, that they are a bigger risk and of course, because they are going to live longer. A lot of times women think, well, my children will take care of me. Men think this, too. Yes, it would be wonderful if your children step in, but you want them to do the fun things for you. You don't want them to do the really nasty jobs.

Benz: Or have trouble in their own careers because they are taking time out to care for you.

Coutu: Exactly. And of course, jeopardizing their health and of course, their future. But it's about buying long-term care insurance, which is getting, as you mentioned, more challenging every day. There are also investments now, latest-generation investments that have long-term care features to them. It's becoming more and more prevalent. There's 10,000 people a day turning 65. It's a potential crisis in our country. Statistics are, 1 out of every 2 people over 65 are in need of sort of long-term care. When it's a woman who is going to live maybe a long time not with quality of life, but she still needs shelter and food, she needs someone to take care of her and she should have a strategy in place for that.

Benz: When you talk about new investments products coming online, are you talking about the hybrid products?

Coutu: Yeah. Well, there's hybrid long-term care policies, but there's also investments that have attached to it features that if you were in need of long-term care, your income, for example, would be enhanced or the lump sum value would be enhanced. It's getting more and more exciting.

Benz: Nancy, really helpful overview of some strategies that women can use to bridge retirement shortfalls. Thank you so much for being here.

Coutu: Thank you, Christine.

Benz: Thanks for watching. I'm Christine Benz for


Brian Bernard: We continue to view narrow-moat Johnson Controls as an attractive investment opportunity. Following its transformative merger with Tyco and its spin-off of its automotive seating business in 2016, Johnson Controls has become a more profitable and less cyclical company, and the firm remains on track to realize over $1 billion in cost synergies by fiscal 2020.

Still, shares have underperformed since the company's transformation leaving shareholders frustrated. However, we think the market has been too focused on the company's recent performance, which has been choppy in part due to its integration efforts with Tyco, and the market is missing the longer-term picture. Based on our analysis, we believe Johnson Controls' building technologies business has one of the most comprehensive product portfolios in the industry. Only United Technologies has a similar product portfolio that spans across commercial HVAC, building automation and controls, and fire and security, and United Technologies is facing activist pressure to sell or spin-off this business. If this happens, we think Johnson Controls could take advantage of disruption at a key competitor.

If Johnson Controls can achieve its cost synergy target, we believe its buildings segment can generate operating margins that are in line or above peers such as Ingersoll Rand and Lennox. Over the next couple of years, we think Johnson Controls can continue to improve its buildings margins, while peers struggle to maintain what we view as peak margins.

In early March, Johnson Controls announced it is exploring strategic alternatives for its power solutions business. Power solutions is the leading global manufacturer of automotive lead-acid batteries. While we've always liked this business, which is the crown jewel in the lead-acid battery market, the fact of the matter is, Johnson Controls is currently not receiving a fair valuation for its buildings and power solutions businesses as a combined entity. Based on our analysis, we believe power solutions is worth about $19 billion, and we think an outright sale of the business for a fair price could be the fastest path to creating shareholder value. That said, we think a joint venture relationship with the right strategic partner or spinning off the business could also create shareholder value.


Eric Compton: Iron Mountain is a nontraditional REIT which does not screen well and which operates in a niche business without any true peers. We think this can lead to opportunities in the stock as it can be easily overlooked by investors.

Iron Mountain primarily provides document storage for enterprises, which is an ostensibly unattractive business. We think enterprise document storage is likely to be around for decades to come, even with the progress of digital storage technology over the last 50 years. We also believe Iron Mountain possesses a narrow moat, based on the presence of switching costs, as the firm possesses a 98% retention rate; intangible assets, based on existing relationships and unmatched retrieval accuracy for important client assets; and efficient scale within the large enterprise storage arena, where we estimate the firm has a near monopolylike market share.

In addition to the firm's strength within their steady, core storage business, Iron Mountain is also making a significant pivot toward data centers, which we believe should offer an attractive return and growth profile for the firm. Finally, after further analyzing the firm's debt burden and ability to sustainably pay out their current dividend, we come to the conclusion that there is a credible path to sustainability for Iron Mountain, and even potential for dividend growth for the firm, which currently has a dividend yield of over 7%.

For investors interested in higher yielding dividend names, we think Iron Mountain could make sense.


Alaina Bompiedi: Investors seeking an investment-grade short-term bond fund and who are comfortable with a bias to corporates can consider Silver-rated Baird Short Term Bond.

The team at Baird aims to generate return through credit selection and gradual sector rotation across corporate bonds, U.S. Treasuries, and securitized fare. Corporates have had a big presence in the fund over the last 10 years, typically ranging from 50%  to 80% of assets since the financial crisis. As of April 2018, that corporate stake totaled just under 55% as the team padded on a defensive position in Treasuries. The team likes issuers that present good value and whose interests are aligned with bondholders. Reflecting those preferences, the fund's credit quality tilts overwhelmingly investment grade. However, the team is willing to hold modest positions in shorter maturity fare from riskier companies that they wouldn't include in funds like Baird Aggregate Bond.

To complement their credit selection, the team maintains a neutral duration to the fund's benchmark, the Bloomberg Barclays US Government Credit 1-3 Year Index, and maintains low fees to subdue to the need for outsize bets. Over the trailing 10-year period, that recipe has helped the fund outpace the majority of its category on a risk-adjusted basis as measured by the Sharpe ratio.


With $6.3 trillion in total assets under management at the end of March 2018, BlackRock is the largest asset manager in the world, and we think it's well-positioned for the future.

At its core, BlackRock is a passive investor, with nearly two thirds of its managed assets in (and nearly half its annual revenue driven by) passive products. Its iShares platform, which is the leading domestic and global provider of ETFs, is riding a secular trend toward passively managed products that began more than two decades ago. As a result, BlackRock is currently generating solid organic growth with its operations, unlike many of its peers in asset management.

BlackRock earns a wide economic moat rating. The size and scale of its operations, the strength of its brands, and the diversity of its assets under management by asset class, distribution channel, and geographic reach provide it with a leg up over the competition. Unlike most of the other asset managers we cover, we continue to project margin expansion for BlackRock during the next five years.

We think BlackRock's moat trend is positive. Through iShares, the firm has a powerful tool for continued growth. We expect the ETF market overall to continue to grow organically at a 10% to 14% annual rate over the next five years, with BlackRock maintaining market leadership both domestically and on a global basis.

Moreover, we've been impressed by BlackRock's handling of the pricing situation with Vanguard and the other low-cost ETF providers. BlackRock has initiated price cuts gradually and only where necessary, with a commitment to attracting long-term investors. BlackRock captures the largest share of ETF inflows--both domestically and internationally. With the three largest players in the ETF industry holding sway over 82% of the domestic market (and 70% of the global market), we believe the market for passively managed ETFs has been sewn up.

BlackRock is trading at a slight discount to our fair value estimate, providing investors with an attractive entry point into a premier asset manager.