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Investing Insights: Lyft's Worth and Bond ETFs for Retirees

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Jake VanKersen: I'm Jake VanKersen, video producer from Morningstar. And I'm en route to pick up Ali Mogharabi from Morningstar research services to get his take on the Lyft IPO.

Ali Mogharabi: Hey Jake, how are you, man?

VanKersen: Good, you?

Mogharabi: Not bad, not bad.

VanKersen: Hopefully not too cold out there?

Mogharabi: No, no. You got here on time, so that's good.

VanKersen: Yeah, Chicago springs. OK Ali. First things first: What we want to know is, what is Lyft worth, what is its fair value estimate, and why?

Mogharabi: Yeah Jake, it's a pretty interesting company. It's the second largest ride-sharing company in United States. And it's actually gaining market share, in a market that we think is worth around $500 billion. So, with pretty strong top-line growth, and profitability, probably by 2022, we think Lyft could be worth around $24 billion.

VanKersen: Morningstar thinks that Lyft has established a narrow moat based on competitive advantages. What are those advantages?

Ali: Yeah, one of the competitive advantages, or moat sources that it has is the network effect, which basically means that on that Lyft platform, both the riders and drivers benefit. Initially, riders were attracted to the platform, to the app because it was easy to use and because of that unique on-demand service that it was providing. And, as more riders jumped on the app, that attracted more drivers, because that was one way for them to, of course, make money, and also complete additional rides. As the number of drivers increased, then the overall service improved, the timeliness of completely those rides and so forth. So that in turn, attracted even more riders. So that virtuous cycle actually took place, which we refer to as the network effect. And we think it's sustainable. And that's one competitive advantage.

The other one is the intangible asset that it compiles, or data. And we think that it can actually utilize that data to improve its services even more. For example, to help the drivers complete more rides, and also, of course, to improve the overall rides that it provides for the riders, in terms of completing them more quickly and accurately.

VanKersen: Which is good, because we all know that Lyft isn't the only rideshare app on the block. There's also Uber, which also has an upcoming IPO. How are these two companies different?

Mogharabi: Well, let me start out with the similarities, Jake. They're very similar when it comes to ride-sharing, and the last mile. And the last mile is conducted through bike-sharing and scooter-sharing. Both of these companies provide that. Now, Uber also provides some additional services, such as food delivery or Uber Eats. And also logistics. And also Uber is more widely available internationally. Lyft is currently focused more on the U.S. and Canada markets. We think that narrower focus could actually help it along the way to a certain extent where it's pretty much avoiding some bumps on the road, especially from an international regulatory standpoint.

VanKersen: OK, so regulation. Whenever you talk about Lyft and Uber, regulation is always in the atmosphere. Is that something that investors should be concerned about?

Mogharabi: Yeah, to a certain extent. As you know, additional regulatory measures bring about additional costs for the company. So it could impact the operating margin of Lyft. However, we also view it as something that could create a barrier to entry for newer and smaller players. Make it a little bit more difficult, make it, of course, a little bit more costly for smaller, or newer players to come into this space, and compete with Lyft and Uber. So, additional regulatory measures could actually help Lyft and Uber maintain their market leadership position.

VanKersen: And the last thing I want to ask you about is the fact that Lyft is giving their drivers a chance to participate in the IPO. How does that work?

Mogharabi: Yeah Jake, actually, in their filing they mention that they basically gave their drivers cash bonuses on March 19. So the way it works out is that the drivers that had completed between 10,000 and 20,000 rides, they got $1,000 in cash bonus. And then the ones that had completed over 20,000 rides, they got $10,000 in cash bonus. Now, what's attractive about that for the drivers is that they have the option to actually use that cash bonus to purchase Lyft shares at the IPO price. So it could give them a pretty good opportunity to invest in the company with which they're working.

VanKersen: This has been great. Thank you for providing us with all this information. We are at your destination.

Mogharabi: Beautiful. Morningstar building, right here. Thanks Jake.

VanKersen: No problem.

Mogharabi: I will talk to you soon.


Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar's director of personal finance, Christine Benz, includes several bond ETFs in her model bucket portfolios for retirees. Specifically, bond ETFs fill the second bucket, which has a three- to 10-year time horizon. She is here today to discuss three of these ETFs.

Christine, thank you for joining us today.

Christine Benz: Susan, it's my pleasure.

Dziubinski: You suggest that retirees include a short-term bond fund in Bucket 2 of their portfolio just in case they've depleted the cash reserves in Bucket 1. What's your ETF pick there?

Benz: The pick is Vanguard Short-Term Bond ETF; the ticker is BSV. And it's a high-quality lowish-duration product. It tends to not move a lot when interest rates are on the move up as was the case in 2018. In 2018, it actually had a positive return even as many other bond products had losses.

Dziubinski: The lion's share of assets in the second bucket of the portfolio are dedicated to sort of a classic core bond approach ETF. What's your pick there?

Benz: Investors could easily use a total bond market index tracker in this slot. But the fund I've used is iShares Core Total USD Bond Market Index; the ticker is IUSB. It includes high-quality bonds, but it also includes a small component of lower-quality higher-yielding bonds. So, in that respect, it's a little better diversified than the total bond market trackers. Of course, those high-yield bonds will also come with a little bit of extra risk.

Dziubinski: And the last pick we're going to talk about today provides some inflation protection in the portfolio.

Benz: Right. So, this is Vanguard Short-Term Inflation-Protected Securities ETF; the ticker is VTIP. And the reason I like this fund is that some of the core TIPS funds, some of the core Treasury Inflation-Protected Securities funds, have a little bit of interest-rate risk. And so, they tend to be quite volatile when interest rates are on the move. This is a product that invests in short-term TIPS. So, it seems to be more or less a pure inflation hedge.

Dziubinski: Great. Christine, thank you so much for sharing your picks with us today.

Benz: Thank you, Susan.

Dziubinski: For, I'm Susan Dziubinski. Thanks for watching.


Christopher Franz: Hello, I'm Chris Franz with Morningstar. I'm here today with John Rogers, chairman, CEO, and CIO of Ariel Investments.

John, thanks for joining me.

John Rogers: Great to be here.

Franz: So, John, you've managed Ariel Fund since 1983 and you've owned Jones Lang LaSalle for almost 18 years. What makes that such a good long-term holding?

Rogers: Well, we think Jones Lang LaSalle is an extremely, extremely well-managed company and they are in a great business. They are in a duopoly. They compete with CBRE when it comes to real estate services. People need to lease property around the world. People buy and sell real estate all around the world. More and more outsourcing is happening, and large companies will hire a firm like JLL to manage all their real estate throughout the world. And then, finally, they have an investment management division where large pension funds that believe in alternative investments can hire JLL to pick real estate for them. And so, they have all these sectors that are doing well. It's a global brand. There's really truly a moat around it where you only have--only CBRE is the real global player that can compete. So, they are well positioned to grow as the economy grows around the world.

Franz: You recently bought Stericycle in 2018, in the market sell-off. Just kind of curious what you like about that stock.

Rogers: Well, Stericycle is very, very cheap. It's one of the things we like about it. It sells at a significant discount to the private market value and the work that we've done to value the company. But they have, we think, a very significant moat when it comes to the medical care industry, where they are like the Waste Management of the healthcare industry. You've got to get rid of things from a hospital, a doctor's office, a dental office, the disposable needles, all the different products that have to be disposed of in a very careful and selective way. Stericycle leads that part of the economy. As we talk to customers of theirs, major hospitals around the world and around the country, everyone uses Stericycle to remove medical waste. It's a core competency that they have and it's very, very hard to find any significant competitors of scale for Stericycle. They also own Shred-It and we think they are going to be able to blend the logistics of the Shred-It brand and their routes with the Stericycle routes, and be able to be more efficient and cost-effective ,and be able to generate more and more profits there. And finally, they have a new CEO, a relatively new chairman of the board, bringing fresh energy in to get the company back on track after some significant setbacks over the last couple of years.

Franz: Great. Well, John, I appreciate your insights.

Rogers: Great to be here.

Franz: For Morningstar, I'm Chris Franz. Thanks for watching.


Christine Benz: Hi, I'm Christine Benz for High-yield bond funds have gotten off to a strong start in 2019 after a weak showing last year. Joining me to provide a recap of what's been going on in the category is senior analyst Brian Moriarty.

Brian, thank you so much for being here.

Brian Moriarty: Thank you. Happy to be here.

Benz: Brian, let's talk about what has been going on in high yield. When investors look at their high-yield funds, year-to-date, they might be pretty impressed because returns have been really quite good. Why the reversal? Because there was a big sell-off in high-yield in late 2018. What's been going on?

Moriarty: Yeah. So, the big story, or the reason is, really, statements from the Federal Reserve. So, in the fourth quarter of 2018, the volatility was driven by the trade and tariff concerns along with a Fed that had been steadily rising rates. That changed in the first week of January with statements from chairman Powell who basically indicated that the Fed was taking a more dovish stance. And after that the markets flipped almost like a switch and since then risk assets, especially high-yield bonds, have been performing quite well.

Benz: OK. So, you put high-yield bonds in the category of risk assets. Equities as well, right?

Moriarty: Absolutely. Yeah.

Benz: OK. Let's talk about how investors should think about their high-yield holdings. Because there have been few murmurs so far in 2019 about recession potentially on the horizon. These holdings would typically get hit pretty hard in a recessionary environment, right?

Moriarty: Yeah. It's important to remember that high-yield bonds are still mostly correlated to equities. So, what investors should really pay attention to when they are looking at their high-yield bond fund, if they own one, is the underlying holdings. Don't just look at the performance. And so, you want to pay attention to, is it lower-quality stuff, CCC or below, nonrated, are there actually equities in the fund, which can happen sometimes, or is it more higher-quality, high BB, high B, more defensive quality businesses? And that will really determine how the fund performs.

Benz: OK. So, do a little due diligence on the portfolio itself.

Moriarty: Absolutely.

Benz: You mentioned stock holdings in the bond portfolio. How common is that?

Moriarty: Occasional. So, it's not super common, but there are a couple notable funds that will be comfortable either owning equity out of a restructuring. So, for example, if one of their holdings goes through bankruptcy restructurings, a lot of times they come out with equity and they tend to hold that for a while. Other funds will actually go out and buy equity on the exchanges and in some cases that can be 10% to 15% of the portfolio.

Benz: OK. But it wouldn't typically go up to like 50%.

Moriarty: No, absolutely not.

Benz: It would be capped at a fairly low level.

Moriarty: Correct. Yeah.

Benz: OK. So, if I'm thinking about high-yield in my portfolio and maybe I'm a little concerned about some sort of a weakening economy or a weakening equity market--it sounds like I should be concerned about that, too--should I be favoring the more defensively minded junk-bond funds? Would that be a sane way to go?

Moriarty: It really depends on your risk tolerance and your time horizon. You always have to keep that in mind. If you think that the recovery or the expansion is going to continue for a couple of years, which it could very well, then a more aggressive fund makes sense. If you are legitimately concerned about a recession, then a defensive, more high-quality bond fund does make sense or a high-quality high-yield bond fund does make sense. But it is important to keep in mind, like I said, that they are still correlated to equities. And so, even a defensive fund will be flat to negative in some sort of a recession or a sell-off.

Benz: OK. So, you brought a short list of some of the high-yield funds that you and the team like and they do run the gamut from some of the more defensively minded ones to very aggressive ones. One that is at the top of your list--it's Gold-rated--is PGIM High Yield. Let's talk about that one. It may be a less familiar name to some of our viewers.

Moriarty: Yes. So, that's an interesting one. We just recently added it to coverage within the last year, and its first rating was Gold, which is pretty impressive. So, this fund really checks all the boxes. So, it has a very rigorous process. It's really a broad market high-yield fund. So, it doesn't play preferences. The team is very strong, and then the parent culture is also very strong and very supportive. PGIM has a history as an insurance asset manager. So that really has dictated or colored their approach to managing this fund. Very long-term outlook, deep research capabilities--and it's also very attractively priced, which helps.

Benz: OK. So, PGIM is P-G-I-M, and this fund, some people might look at it and say, "Well, that's a load fund, I'm a no-load investor." You can actually buy it on some of the supermarket platforms, though, without a load?

Moriarty: That's correct. So, the Z shares in particular are available at Schwab, both no-load and No Transaction Fee.

Benz: OK. Let's talk about a more conservative entrant, Vanguard High-Yield Corporate, also a Silver-rated fund and this one does tend to be a little higher-quality than some of its competitors.

Moriarty: That's correct. So, it tends to avoid or at least underweight a lot of the lowest-quality stuff. So, it's normally underweight CCC rated bonds relative to peers and the benchmark. It really focuses on the highest-quality most-liquid names. It also tends to hold a pretty decent chunk of both cash and Treasuries, which helps it hold up in down markets and helps the liquidity profile of the fund. And like most Vanguard funds, it's one of the cheapest, which actually gives it--it's not just attractive on a holdings basis--it actually gives it a leg up relative to more-aggressive peers that charge a higher fee. So, that does play out in the performance of the fund.

Benz: So, is the idea that the management doesn't have to stretch to deliver a competitive yield because the expenses are so low?

Moriarty: That's exactly. Yeah.

Benz: OK. Another fund that you say is sort of at the opposite, more-aggressive end of the spectrum is Fidelity Capital & Income. So, this is one where you'd want to have a nice long time horizon and a good tolerance for volatility.

Moriarty: Exactly. Yeah. So, this [is a] very strong team like all of the funds that we are talking about today. Manager Mark Notkin has led this fund for a long time--one of the more distinguished managers in the high-yield bond category. But this is a very aggressive fund. Like we talked about before, this is the one that tends to hold a decent amount of equities, anywhere from 10% to 20%, that he is going out and buying in the market, especially if he thinks equities are more attractive relative to high-yield bonds, which is an analysis that he does. So, something to keep in mind. But this very much will be at the more aggressive end of a portfolio and will get hit the hardest mostly likely in any sort of equity sell-off or a market recession.

Benz: OK, Brian. Great thorough recap. Thank you so much for being here today.

Moriarty: You're very welcome. Thank you.

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


Eric Compton: After an extensive review of the competitive positioning of the big four U.S. money center banks, we have upgraded the moat ratings of JPMorgan and Bank of America to wide, while maintaining the moat rating of Wells Fargo at wide and Citigroup at narrow.

Our upgrades are based on a stronger U.S. banking system as well the increasing importance of size and scale in the banking industry. We believe the U.S. banking system is much stronger than it was a decade ago, leaving more room for wide moats among the best-positioned banks. Capital levels present within the system are higher than ever, and regulatory reform has reduced or eliminated many of the riskier activities within the money center banks.

We see the largest banks finally being able to focus on maximizing the value of their own franchises, largely based on scale and economies of scope advantages, enabled by ever improving technology platforms. On the consumer side, each bank is able to cross-sell multiple products, provide advantaged pricing to key customer segments, and spread the overall costs of customer acquisition across more revenue streams. On the commercial side, similar dynamics apply, and each bank is able to offer a complete package with national and/or global scale that few can compete with, while sending out armies of bankers to both existing and new markets in an effort to win new business. Over time, we see a bifurcation between the banks with the most scale, the most complete product stacks, and the most advanced technology backbones, and those that do not. We believe the wide moat money center banks, which have the largest tech budgets in banking, are likely to be in the first group.

While we are now more positive on the competitive positioning of JPMorgan and Bank of America, we believe this is largely priced in and view the names as reasonably valued. Instead, we see the most value in Wells Fargo and Citigroup, as each have their own issues and negative associations they are trying to deal with.


Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. This is the season when many investors fund their IRAs. You have until April 15 to make a contribution for the 2018 tax year. But if you are hurtling toward retirement, or already retired, should you make those contributions? Joining me to discuss this topic is Christine Benz, director of personal finance for Morningstar.

Christine, thank you for joining me today.

Christine Benz: Susan, it's great to be here.

Dziubinski: Now, an obvious question for older adults thinking about making IRA contributions is, is it really worth it? Is the tax deferral worth it when you are looking at a shorter time horizon?

Benz: Well, it's a really good point and you do want to think about that. The fact that you have a longer runway to benefit from the tax-deferred compounding does create some trade-offs because you may have to pull the money out at age 70.5 for required minimum distributions if it's a traditional IRA, and you may have some strictures on your money. So, I think it's important to consider that. But nonetheless, there is some opportunity to benefit from tax-deferred compounding.

One thing to keep in mind is whether you are doing a traditional or Roth IRA. So, if you are making a traditional IRA contribution, you are subject to those RMDs. So, say, you are age 60 and you are putting money into a traditional IRA, well, that's only a 10-year runway to benefit from that tax-deferred compounding before the money has to start coming out. On the other hand, if you are someone who is in the lucky position of not needing all of your money for retirement, so maybe you are mainly saving for your heirs at this point and you are putting money in a Roth IRA, which is not subject to required minimum distributions. There you have a longer runway for the tax-sheltered compounding. So, the advantages start to accrue if you expect that you will not need to pull your money out and spend it during retirement.

Dziubinski: So, overall, it sounds a little bit like a Roth contribution might have the advantage for a lot of people?

Benz: It does, but I think you want to keep in mind whether you are eligible to take a deduction on your contribution. If you are someone who is looking at your situation and thinking, well, realistically, I have not saved that much for retirement and I am able to make a deductible traditional IRA contribution, that may in fact be the better idea than saving within a Roth IRA.

Dziubinski: Let's go over the rules related to IRA contributions. For starters, if you are over age 70 1/2, you can't make a contribution to a traditional IRA, right?

Benz: That's right. And that makes sense, too, right? We talked about how required minimum distributions apply to those traditional IRAs. So, why would you want to make a contribution while you are simultaneously having to withdraw from the account. On the other hand, you can make a Roth IRA contribution at any age, but the key proviso is that you need to have earned income. Either you or your spouse needs to have enough earned income to cover the amount of your contributions. I sometimes talk to retirees who tell me, "Well, I continue to do some sort of contracting work specifically for this reason, because I want to continue to make Roth IRA contributions." But you do need to have earned income. Money that you are pulling from Social Security, money that you are pulling from your traditional IRAs does not count as earned income.

Dziubinski: Another thing you've talked about in the past is that you think it's important that you take advantage of catch-up contributions if you can, and you are making contributions in the first place.

Benz: Right. So, these allow people who are over age 50 to get additional assets in Roth IRAs. So, for people funding a 2018 IRA, the contribution limit is $6,500 if you are over age 50. It's ticking up a little bit for the 2019 tax year. You will be able to put $7,000 into an IRA if you are over age 50. Another thing to keep in mind if you are just turning 50 is that you don't have to wait until your birthday to start making those additional contributions. Jan. 1 of the year in which you will turn age 50 you are eligible for those catch-up contributions.

Dziubinski: What are some suggestions you have for how to invest if I'm over age 50 and I want to open up an IRA?

Benz: This is a good time to take a step back, look at what you already have in your portfolio. So, maybe you are someone who has spent most of your career saving within in the confines of a company retirement plan. Well, look at whether there are categories or asset classes where you want to add additional assets. So, maybe you've got a good 401(k) plan at work, but it doesn't have any inflation-protected bond exposure, for example, there's no choice in that category. Well, maybe that's a category where you use your IRA to kind of complete what's already in your 401(k). If, on the other hand, you want to use your IRA as kind of a stand-alone account, I think a target-date fund or a balanced fund or maybe a 70-30 type product like a Vanguard Wellington could be perfectly appropriate in that slot.

Dziubinski: Christine, as usual, a lot of great food for thought. Thank you very much for joining us today.

Benz: Susan, it's my pleasure.

Dziubinski: For Morningstar, I'm Susan Dziubinski. Thanks for watching.