Investing Specialists

How Our Schwab Retirement Saver Portfolios Have Performed

Christine Benz

While Schwab's mutual fund supermarket is a bit light on reasonably priced bond funds, it's a great place for equity-focused investors to build their portfolios. In addition to Schwab's fine lineup of low-cost index funds and ETFs, it also features standout actively managed offerings from many of Morningstar's favorite firms. Funds from Matthews, Harbor, and Oakmark, among others, are available on the firm's platform without any loads or transaction fees.

We launched a series of model portfolios for Schwab supermarket investors three years ago. There are four portfolio series altogether: taxable and tax-sheltered portfolios for retirees, as well as taxable and tax-sheltered portfolios for people who are still working and saving for retirement

Now that the portfolios have three years' worth of history under their belts, it's an opportune time to review their performance and take a deep dive into their holdings. My goal with these portfolios is to make changes only when there are substantive changes to the holdings. As was the case with the Schwab supermarket portfolios geared toward retirees, manager changes, closures, and analyst rating downgrades prompted changes in these portfolios as of the latest review.

How to Use the Portfolios
As with the other portfolios, I used Morningstar's Lifetime Allocation Indexes to guide the asset-class exposures for these Schwab portfolios. To help populate the portfolios with specific funds, I leaned on Morningstar's medalist ratings and input from Morningstar's analyst team.

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 Retirement Saver Portfolio for Schwab Supermarket Investors
20%:  Oakmark Fund (OAKMX)
10%:  Harbor Capital Appreciation (HCAIX)
15%:  Schwab Total Stock Market Index (SWTSX)
10%:  Diamond Hill Small-Mid Cap (DHMIX)
30%:  Harbor International (HIINX)
5%:  Harding Loevner Emerging Markets (HLEMX)
5%:  Metropolitan West Total Return Bond (MWTRX)
5%: Credit Suisse Commodity Return (CRSAX)

Performance
3-Year Annualized Return: 10.50%

The Aggressive Schwab Supermarket Retirement Saver Portfolio in its original form returned nearly 11% on an annualized basis over the past three years. The fact that it was the best-performing of the three Schwab Saver Portfolios isn't surprising considering that it's the most equity-heavy, with a roughly 90% equity weighting. The portfolio's large-cap equity positions contributed the biggest gains during the period: Oakmark Fund and Harbor Capital Appreciation gained 16% and 18%, respectively, on an annualized basis over the past three years. Schwab Total Stock Market Index fell between the two. The international equity component of the portfolio didn’t perform as well; while Harding Loevner Emerging Markets delivered a respectable 11% gain, Harbor International is in the midst of a weak patch. Credit Suisse Commodity Return was the portfolio's only losing holding over the three-year period.

Changes
I made several changes to these portfolios, owing to manager changes, analyst downgrades, and closures.

While I retained Harbor Capital Appreciation, Schwab Total Stock Market Index, and Oakmark Fund as core equity holdings, Diamond Hill Small Mid Cap's closure to new investors prompted me to steer its allocation into the Schwab Total Stock Market Index fund, which itself includes decent (albeit more diffuse) exposure to small- and mid-cap stocks. Diamond Hill remains highly rated by Morningstar's analyst team, so investors who already own it have good reason to hang on. But the portfolios are designed to be investable, so all of the holdings need to be open to new investors.

In keeping with a recent switch in the Schwab Bucket portfolios, I replaced Harbor International with  American Funds International Growth and Income (IGIFX). The Harbor fund has seen significant shareholder redemptions and recently underwent a manager change; Harbor has also indicated that the fund will make an enormous capital gains distribution later this year. Morningstar still rates the fund as a medalist, but recently downgraded it to Bronze. American Funds International Growth and Income, meanwhile, features a sensible focus on reasonably priced dividend payers overseas, a seasoned management team, and a fair expense ratio. Ample emerging markets exposure means it won't be immune to volatility, but it has managed with the prudence that has long characterized the American Funds lineup.

Harding Loevner Emerging Markets is no longer available to new investors, so I dropped its position and added the proceeds to American Funds International Growth and Income, which itself has ample emerging-markets exposure.

Finally, I dropped Credit Suisse Commodity Return Strategy, to align with the Lifetime Allocation Indexes' lower weightings in commodities. While the indexes haven't excised commodities altogether, they have taken the positions down to the low single digits, in light of the negative roll-yield effects that have bedeviled commodities futures products. My bias is to run these portfolios with as few holdings as are needed to deliver diversification, so I decided to excise commodities altogether instead of maintaining small positions. I steered the 5% of assets that had been earmarked for commodities into American Funds International Growth and Income.

Moderate Retirement Saver Portfolio for Schwab Supermarket Investors
20%: Oakmark Fund
10%: Harbor Capital Appreciation 
15%: Schwab Total Stock Market Index 
10%: Diamond Hill Small-Mid Cap 
20%: Harbor International 
5%: Harding Loevner Emerging Markets 
15%: Metropolitan West Total Return Bond 
5%: Credit Suisse Commodity Return 

Performance
3-Year Annualized Return: 10.17%

Although this portfolio has just 80% of equities, versus 90% for its Aggressive counterpart, international stock holdings account for the Aggressive portfolio's 10-percentage-point differential. Because international stocks haven't performed that well over the past three years, the Moderate portfolio's returns have been just a hair lower than the Aggressive version. The large-cap U.S. holdings gave returns the biggest boost, whereas stakes in Metropolitan West Total Return Bond and the commodity fund detracted from it.

Changes
I implemented all of the changes discussed in relation to the Aggressive portfolio in the Moderate portfolio, too. Specifically, I cut the closed Diamond Hill Small-Mid Cap and steered the proceeds into Schwab Total Stock Market Index. I replaced Harbor International with American Funds International Growth and Income, and also removed the closed Harding Loevner Emerging Markets, steering those assets to American Funds International Growth and Income. Finally, I removed the position in Credit Suisse Commodity Return and sent the proceeds to American Funds International Growth and Income.

Conservative Retirement Saver Portfolio for Schwab Supermarket Investors
15%: Oakmark Fund
5%: Harbor Capital Appreciation
10%: Schwab Total Stock Market Index
7%: Diamond Hill Small-Mid Cap
12%: Harbor International
3%: Harding Loevner Emerging Markets
30%: Metropolitan West Total Return Bond
7%: USAA Short-Term Bond
6%: BlackRock Inflation-Protected Bond 
5%: Credit Suisse Commodity Return 

Performance
3-Year Annualized Return: 7.13

With just over half of its assets in stocks, this portfolio's returns were meaningfully below those of its more equity-heavy Aggressive and Moderate counterparts. Because this portfolio is geared toward retirement savers who are just five years from retirement, it includes exposure to categories that aren't found in the Aggressive or Moderate portfolios--short-term and inflation-protected bonds. With the bond market rewarding risk-taking and inflation benign over the past three years, their absolute returns were muted.

Changes
I implemented all of the same changes here that I made in the Aggressive and Moderate portfolios. I steered the position in closed Diamond Hill Small-Mid Cap to Schwab Total Stock Market Index, and replaced Harbor International with American Funds International Growth and Income. In addition, I steered the proceeds from the closed Harding Loevner Emerging Markets to American Funds International Growth and Income, and did the same with the assets from Credit Suisse Commodity Return.

I also made some changes on the bond side. While I retained the core position in Metropolitan West Total Return Bond, both USAA Short-Term Bond and BlackRock Inflation Protected Bond have experienced manager changes and ratings downgrades. As a result, I replaced them with bond funds with more certain prospects.  Baird Short-Term Bond (BSBSX), a Silver-rated offering run by an extremely seasoned team, fills the short-term slot; Morningstar's analyst team considers it one of their highest-conviction short-term bond fund pick. For exposure to inflation-protected bonds, I swapped in  Schwab Treasury Inflation Protected Securities (SWRSX), which features an ultracheap 0.05% expense ratio. 

Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.