Bucket Portfolios Get Boost From Market Performance in 2019

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. Stock and bond markets performed exceptionally well last year, and that helped boost the performance of Christine Benz's model retirement saver and bucket portfolios. She's here with me today to provide a recap.

Christine, thanks for joining me today.

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

Dziubinski: Happy New Year!

Benz: Happy New Year!

Dziubinski: Let's start out with talking a little bit about the portfolios in general, what they are, and where investors can find them.

Benz: These are on the Quick Links part of the home page on Morningstar.com. You can find a link through to all of the different variations of portfolios. We've created these bucket portfolios, which are designed for people who are in retirement. We've also created a suite of saver portfolios for people who are still saving for retirement. And within each of those silos, we have created different subportfolios. So, we've created mutual fund portfolios composed of some of our analysts' highest-conviction mutual funds and we've also created ETF portfolios. We've also created some fund-family-specific portfolios. We often talk to investors who say, "Well, I do all my business with Fidelity, or I do all my business with Vanguard, or T. Rowe Price, or Schwab." So we've created portfolios that are specific to those firms as well. I've also created some tax-efficient portfolios. For people who are investing within the confines of a taxable account, the idea is that we're trying to minimize the drag of taxes on an ongoing basis. The rest of the portfolios are created without regards for tax efficiency. So, they're meant for your tax-sheltered accounts.

Dziubinski: So, there's something for everyone?

Benz: Yes, that's right.

Dziubinski: What are goals for the portfolios overall?

Benz: The goal is to showcase what I think are sound asset-allocation principles. I think a lot of times asset allocation, like how to structure a portfolio, is kind of shrouded in mystery, and a lot of providers say, "Well, you need to buy that from us." Our idea was to showcase sane asset-allocation principles for people at various life stages and with various risk tolerances. Another idea behind the model portfolios is to take some of our analysts' highest-conviction ideas, whether mutual funds or ETFs, and show how they could work together in a portfolio.

Dziubinski: Specifically to recent performance--2019 specifically--I'm guessing it was a pretty good year for the portfolio.

Benz: It was a great year, yes.

Benz: You just recently recapped the portfolios. What were some of your findings?

Benz: No special genius on my part in terms of putting them together. Almost wherever you invested in 2019, you did OK. Certainly, the equity-heavy portfolios performed best. So, within the saver suite, the aggressive portfolios performed best. They gained about 24%, 25%. And then, the conservative portfolios, as you would expect, because they have more bonds, the bucket portfolios have cash as well as bonds, they didn't perform as well. But even there, returns were in the range of 13%-15%. So, a pretty good year overall.

Dziubinski: I bet that's quite different from what you saw in those portfolios in 2018, the year prior.

Benz: It absolutely was. In fact, I was looking back on my recap of 2018 performance and the headline really was that cash was the best performer in the bucket portfolios. The saver portfolios don't hold cash. So, there, short-term bond holdings were the best performers. But it was really a complete reversal. And I think Oakmark International Small Cap, which is a holding in the retirement saver portfolios, is a great example of just how completely things flipped in 2019. In 2018, it had a 24% loss. It was really the worst performer in any of the portfolios. In 2019, it gained about 31%. So, it didn't quite atone for that bad 2018. And you know how the math works out. When you have losses, it's hard to dig yourself out. But nonetheless, I think it does illustrate just what a reversal we saw in 2019, where the more aggressive you were, really, the better off you were last year.

Dziubinski: You have portfolios that are largely ETFs and others that are largely mutual funds. Did you observe any differences in the portfolio between those two types?

Benz: I try to keep an eye on that. And one thing that I have thought about in assembling the portfolios is I really try to keep the risk profile analogous. So, the retirement saver portfolio for moderate investors in terms of its asset allocation and overall complexion, between the mutual fund and the ETF portfolio, they should be pretty tightly aligned. And I was happy to see when I compared performance, I really saw performance pretty much in lockstep. However, the total stock market index is a bigger holding in the ETF portfolios than is the case in the mutual fund portfolios. That was a tremendously strong holding last year. So, investors who are just looking to a very vanilla product for their equity holdings did really well last year. The mutual fund portfolios do own some total market exposure, but they also own some active funds. We had a few, I would say, not great years among some of our active funds. PRIMECAP Odyssey Growth is one of the core equity holdings in the retirement saver portfolios. It had a strong year in absolute terms but not a great year in relative terms. Oakmark Fund didn't perform as well as Total Market Index. So, those held performance back a little bit relative to the ETF-only portfolios.

Dziubinski: Got you. Now, if investors are following these portfolios on their own, what are some things they should be thinking about right now, or even with their own portfolios?

Benz: Any investor using a bucket strategy, so someone who's already retired, should take a look at their 2019 gains. And in my view, consider pairing some of the portfolio holdings that have appreciated the most, stripping back on them a little bit, refilling the cash bucket if you've spent from it over the past year, potentially topping up bonds as well. I think it's a good time to size up your total portfolio's asset allocation. Potentially take some of your winnings and move them to the conservative side of the ledger. For people who are in retirement savings mode, I think that they probably also want to take a look at their asset allocation but take a special attention to the intra-asset-class exposures in a portfolio. Even though foreign stock funds had a terrific year in 2019, generally speaking, they underperformed U.S. equities. So, I think that's a repositioning that investors might consider. Also, look at how your portfolio is arrayed across the Morningstar Style Box. Value stocks generally didn't perform especially well in 2019, certainly not relative to growth. So, you might be able to do some repositioning there as well.

Dziubinski: That makes a lot of sense. Christine, thank you for your time today, and I'll see you a year from now to talk about the 2020 performance of your portfolios.

Benz: Sounds good. Thank you, Susan.

Dziubinski: Thank you. I'm Susan Dziubinski for Morningstar. Thanks again for tuning in.