How Our T. Rowe Price Retirement Saver Portfolios Have Performed
We review performance and discuss changes.
A year like 2018 is a perfect illustration of why investors with long time horizons--which is the target audience for my Retirement Saver portfolios--can get themselves into trouble with tactical timing moves.
After all, market prognosticators had been warning that equity valuations were lofty heading into this year, and rising interest rates were apt to hurt stocks, too, right? Equities' volatility in the first quarter seemed to provide corroboration that stocks' bull run was coming to a close.
Yet here we are, eight months into 2018, and U.S. stocks have performed just fine. An investor who pre-emptively moved his or her portfolio into a defensive crouch would have missed out on the gains.
That's why my model portfolios are designed to be strategic (not tactical) and hands-off. They're meant to depict sound asset allocation and portfolio-management strategies rather than fancy footwork; I'll make changes only if there's a meaningful change in one of the holdings or in the indexes that underpin the portfolios' asset allocations.
T. Rowe Price funds lend themselves especially well to that effort. The firm's funds are designed with the long view in mind. The managers typically ply disciplined strategies that often lean to the mild side of their categories, and the firm has historically done a good job of hiring fund managers and retaining them for many years. T. Rowe Price (TROW) stands out as the rare publicly traded asset manager that has successfully balanced the interests of its corporate stockholders with those of its fund shareholders.
That said, now that the fund-family-specific model portfolios have three years' worth of performance under their belts, it's a good time to take stock of how they've performed so far and discuss whether anything notable has happened with their holdings or their asset allocation benchmarks.
As with the other portfolios, I used Morningstar's Lifetime Allocation Indexes to guide the asset-class exposures for these T. Rowe portfolios.
To help populate the portfolios with specific funds, I leaned on Morningstar's medalist ratings and input from Morningstar's analyst team, including Katie Reichart, Sarah Bush, and Bill Rocco. The portfolios are designed to be investable, so when holdings close to new investors, we'll supplant them with new holdings that are accessible to new investors. That was the case earlier this year, when T. Rowe Price International Discovery (PRIDX) closed to new investors; I deployed the assets that had been earmarked for that fund into T. Rowe Price Overseas Stock (TROSX).
Investors should use their proximity to retirement to help determine which portfolio is the best fit for them, while also taking into consideration the presence of other income sources they'll be able to rely on during retirement. To use a simple example, a 55-year-old investor with a pension that will provide all of her in-retirement income needs could reasonably employ the Moderate or even Aggressive versions, assuming she has a high risk tolerance to match her high risk capacity. (This article explains the important difference.)
At the opposite extreme, a 30-year-old who enters a high-anxiety state during volatile markets might employ the Moderate portfolio, even though his time horizon is long enough to support a higher equity weighting.
Aggressive T. Rowe Price Retirement Saver Portfolio
Anticipated Time Horizon to Retirement: 40 years
20%: T. Rowe Price Dividend Growth (PRDGX)
15%: T. Rowe Price Equity Index 500 (PREIX)
10%: T. Rowe Price New America Growth (PRWAX)
10%: T. Rowe Price Small-Cap Value (PRSVX)
35%: T. Rowe Price Overseas Stock
5%: T. Rowe Price New Income (PRCIX)
5%: T. Rowe Price Real Assets (PRAFX)
3-Year Annualized Return: 11.93
The Aggressive T. Rowe Price Retirement Saver Portfolio as it stands today returned nearly 12% on an annualized basis over the past three years. The fact that it was the best-performing of the three T. Rowe Saver Portfolios isn't surprising considering that it's the most equity-heavy, with a roughly 90% equity weighting. The portfolio's noncore equity positions contributed the biggest gains during the period: New America Growth and Small-Cap Value gained 19% and 17%, respectively, trouncing the S&P 500 during the period. The portfolio’s U.S. equity holdings strongly outperformed its sizable foreign-stock position.
As noted above, T. Rowe Price International Discovery closed to new investors earlier this year. I decided to dedicate its previous allocation to large-cap sibling T. Rowe Price Overseas Stock. T. Rowe Price doesn't field any other international funds that are similarly focused on small- and mid-cap stocks, and the position size was small enough that shedding it shouldn’t make a big difference to long-term performance. International Discovery is still a standout, earning a Silver rating from Morningstar's analyst team, so investors who bought it before the closure have ample reason to stand pat.
Moderate Bucket Portfolio
Anticipated Time Horizon to Retirement: 20 or more years
20%: T. Rowe Price Dividend Growth
15%: T. Rowe Price Equity Index 500
10%: T. Rowe Price New America Growth
10%: T. Rowe Price Small-Cap Value
25%: T. Rowe Price Overseas Stock
15%: T. Rowe Price New Income
5%: T. Rowe Price Real Assets
3-Year Annualized Return: 11.32%
The Moderate portfolio returned just over 11% over the past three years on an annualized basis, just a touch below the Aggressive portfolio, which has a much larger stake in equities. One of the reasons its performance was so competitive is that even though the portfolio has a larger stake in fixed-income investments that logged muted returns, its smaller stake in foreign stocks gave it a boost. The same holdings that benefited the Aggressive portfolio also gave the Moderate portfolio a boost--namely, Small-Cap Value and New America Growth.
Changes: As with the Aggressive portfolio, this portfolio shed its stake in T. Rowe Price International Discovery when it closed this year.
Conservative Bucket Portfolio
Anticipated Time Horizon to Retirement: 5 Years
15%: T. Rowe Price Dividend Growth
15%: T. Rowe Price Equity Index 500
5%: T. Rowe Price Small-Cap Value
15%: T. Rowe Price Overseas Stock
30%: T. Rowe Price New Income
7%: T. Rowe Price Short-Term Bond (PRWBX)
8%: T. Rowe Price Inflation-Protected Bond (PRIPX)
5%: T. Rowe Price Real Assets
3-Year Annualized Return:7.52%
With 45% of its assets in bonds, this portfolio's returns were naturally below its more equity-heavy counterparts amid the strong equity market over the past three years. The portfolio's equity allocation is also more "vanilla" and higher-quality than the Aggressive and Moderate portfolios. That complexion held back returns relative to those portfolios in a market paced by small-cap growth stocks but should have a volatility-smoothing effect in an equity market sell-off. Linchpin equity holding T. Rowe Price Dividend Growth, for example, focuses on companies with the financial wherewithal to pay and increase dividends, a strategy that has typically led to lower volatility than the broad market.
Changes: As with the other portfolios, this portfolio moved its entire foreign-stock position into T. Rowe Price Overseas Stock when T. Rowe Price International Discovery closed to new investors earlier this year.
Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.