In contrast with their stellar performance in 2019, the year 2020 is shaping up as a year to forget for the equity-heavy Retirement Saver portfolios.
While the portfolios have made up ground over the past three-plus months, as market sentiment has reversed course and stocks have rallied, all six portfolios (three mutual fund, three exchange-traded fund) are in the red for the year to date through June 2020.
Those losses aren’t unexpected: After all, the portfolios have between 50% and 90% invested in equities, and the U.S. market, as measured by the S&P 500 and total market indexes, was in the red at mid-year, albeit by just a small amount. Moreover, both the mutual fund and ETF series have heavy allocations to foreign stocks, which have underperformed the U.S. for the year to date.
That said, some of the individual fund choices, especially value-leaning ones, have detracted from near-term results. That was especially apparent in the traditional mutual fund portfolios, which are populated with active-fund bets.
Here's a recap of my core Mutual Fund and ETF Saver Portfolios in the year's first half: what worked and what didn't work so well. I didn't make any changes to the portfolios during the period; both the mutual fund and ETF portfolios remain the same.
Aggressive Mutual Fund Saver Portfolio
20% Primecap Odyssey Growth POGRX
20% Oakmark Fund OAKMX
15% Vanguard Extended Market Index VEXAX
33% Vanguard Total International Stock Index VTIAX
7% Oakmark International Small Cap OAKEX
5% Metropolitan West Total Return Bond MWTRX
2020 Return (through June 30): -9.66%
Moderate Mutual Fund Saver Portfolio
15% Primecap Odyssey Growth
15% Oakmark Fund
15% Vanguard Dividend Appreciation Index VDADX
10% Vanguard Extended Market Index
21% Vanguard Total International Stock Index
5% Oakmark International Small Cap
19% Metropolitan West Total Return Bond
2020 Return (through June 30): -6.50%
2020 Return (through June 30): -6.50%
Conservative Mutual Fund Saver Portfolio
10% Primecap Odyssey Growth
10% Oakmark Fund 10% Vanguard Dividend Appreciation Index
7% Vanguard Extended Market Index
10% Vanguard Total International Stock Index
4% Oakmark International Small Cap
30% Metropolitan West Total Return Bond
7% Fidelity Short-Term Bond FSHBX
12% Vanguard Short-Term Inflation-Protected Securities Index VTAPX
2020 Return (through June 30): -2.60%
The Retirement Saver portfolios, composed of traditional mutual funds, are designed for investors who believe that active management can add value and can also put up with periods of short-term weakness. As such, they tend to be more idiosyncratic than the ETF portfolios, whose exposures are more indexlike.
Some of those active-fund positions have experienced underwhelming results of late, including Gold-rated Oakmark Fund and Bronze-rated Oakmark International Small Cap. The former has suffered for its value leanings in a market that has favored growth stocks, and a long-standing position in financials, hard-hit during this pandemic, has also stung. Oakmark International Small Cap, meanwhile, also leans toward value in its foreign small-/mid-cap blend Morningstar Category, and value stocks have underperformed overseas as in the U.S. Morningstar director of equity strategies Dan Culloton notes that, true to form, the fund has leaned into some of the global market’s least-loved areas, including industrials, financials, and small-cap value stocks in the U.K. and developed Europe. That positioning has exacerbated near-term losses but should hold the fund in good steady in a global economic recovery.
Primecap Odyssey Growth is also experiencing a rough patch. The fund lands in the strong-performing large-growth category, and while its absolute results have been solid, it has badly lagged that peer group. It doesn’t own sizable positions in many of the technology high-fliers that have boosted rival funds, and its managers’ contrarian streak has also led them to unloved names, including airline stocks. Morningstar analysts still have conviction in the team and the strategy, though, and rate the fund Gold.
On the plus side, the portfolios' bond positions have limited the losses, especially the Conservative one, which is geared toward people who are about to retire. Core fixed-income position Metropolitan West Total Return Bond, an intermediate-term core-plus fund, not surprisingly trailed the Bloomberg Barclays Aggregate Index in the first quarter. (Core-plus funds have more exposure to higher-risk, higher-yielding bonds than is the case for the benchmark.) But thanks to its conservative positioning coming into the turbulence, it managed to post a gain during the quarter and is well ahead of its peers for the first half of the year. Fidelity Short-Term Bond, which appears in the Conservative portfolio to provide safety and liquidity for near-retirees, performed admirably during the first quarter--in line with our expectations for it.
Aggressive ETF Saver Portfolio
50% Vanguard Total Stock Market ETF VTI
10% Vanguard Small-Cap Value ETF VBR
30% Vanguard FTSE Developed Markets ETF VEA
5% Vanguard FTSE Emerging Markets ETF VWO
5% iShares Core Total USD Bond Market ETF IUSB
2020 Return (through June 30): -7.44%
Moderate ETF Saver Portfolio
47% Vanguard Total Stock Market ETF
8% Vanguard Small-Cap Value ETF
20% Vanguard FTSE Developed Markets ETF
5% Vanguard FTSE Emerging Markets ETF
20% iShares Core Total USD Bond Market Index ETF
2020 Return (through June 30): -4.97%
Conservative ETF Saver Portfolio
33% Vanguard Total Stock Market ETF
5% Vanguard Small-Cap Value ETF
10% Vanguard FTSE Developed Markets ETF
4% Vanguard FTSE Emerging Markets ETF
30% iShares Core Total USD Bond Market Index ETF
11% Vanguard Short-Term Inflation-Protected Securities ETF VTIP
7% Vanguard Short-Term Bond ETF BSV
2020 Return (through June 30): -1.61%
All three of the ETF portfolios outperformed their traditional mutual fund counterparts during the first half. Vanguard Total Stock Market composed the largest equity position in all of the portfolios: Through the first half, it had performed well relative to its large-blend peers and most most active U.S. equity funds, thanks to its heavy exposure to dominant technology stocks such as Microsoft MSFT and Apple AAPL. The fact that each of the portfolios holds small positions, ranging from 5% to 10%, in Vanguard Small-Cap Value Index,didn't detract significantly from results.
On the bond side, core holding iShares Core Total USD Bond Market ETF lagged the Bloomberg Barclays Aggregate Index during the first half, in large part because of the former fund's small stake in low-quality bonds. The iShares fund dramatically outperformed the index in the second quarter, however. Vanguard Short-Term Bond, which appears in the Conservative portfolio to provide liquidity and stability for near-retirees, is having a predictably standout year thanks largely to its stalwart performance in the first quarter.