Christine Benz: Hi, I'm Christine Benz for Morningstar.com. What makes a fund a top pick for a retirement portfolio? Joining me to share some of his favorite retirement picks is Russ Kinnel. He is director of manager research for Morningstar.
Russ, thank you so much for being here.
Russ Kinnel: I'm glad to be here.
Benz: Russ, let's talk about retirement holdings. Say, someone is in retirement, do you think their holdings should necessarily look different than the holdings that someone who is still in accumulation mode should hold, apart from the asset allocation decisions?
Kinnel: Maybe a little bit, maybe a little more caution. Obviously, even when you are in retirement, you still probably have a long-term time horizon. I don't think it should be a drastic difference. When you look at it, you may want to adjust risk down a little bit, but also think about if you've, as you mentioned, changed the asset allocation, so you've got a lot more in fixed income, then you may also want to be aware of some of those specific fixed-income risks, which if it was 20% of your portfolio, it didn't matter. But now, if it's, let's say, 50%, 60%, 70%, now you want to think about things like interest-rate risk and inflation risk as well.
Benz: Diversify within that bond portfolio. You might build out positions that you didn't really have room for before?
Benz: Should costs play a greater role in the equation when you are retired, or should they be a huge consideration all the way through?
Kinnel: I would say costs are always crucial for sure. But certainly, in retirement, I think, the expenses are subtracted from income. The lower your fees, the more income is going to be flowing through to you.
Benz: In your newsletter, Morningstar FundInvestor, you have a lot of funds that you talk about that you like. I asked you to bring some of your favorite ideas for retiree portfolios, and you brought a grab bag of different categories. One that you brought is a core intermediate-term bond fund. Let's talk about that one.
Kinnel: I think intermediate makes sense just because there's a little less interest-rate risk. Intermediate is a really diverse category. There's some very aggressive funds in there. I brought one on the conservative end. Fidelity Intermediate Term Bond is a fund that has interest-rate risk below the peer group average. It has credit risk below the peer group average. It's very mild-mannered. But if you've also got high-yield or some other riskier funds out in your portfolio, this is kind of a nice core anchor for you. Because it's so low risk, it's actually hasn't had great performance lately, but again, I think that's OKif you understand what you are getting. It's got low costs, it's run well, and I think a really nice dependable yet boring fund.
Benz: For investors who are looking at their portfolios and seeing that their equity holdings have gotten enlarged and perhaps want to add a little to the bond piece. It sounds like this is a good core pick?
Benz: That Fidelity fund is a taxable bond fund. You'd want to be sure to hold it inside some sort of tax-sheltered retirement account. How about a fund for retired investors' taxable accounts? You have a pick there?
Kinnel: I like T. Rowe Price Summit Muni Intermediate Fund because it doesn't have really big interest-rate risk. It does have a little bit of credit risk. And so, they take some risks at the margins. Charlie Hill has done a really nice job guiding this fund through thick and thin, and I think it's a kind of steady performer that again is a really nice fund. Obviously, not all retirees need munies. It depends on what your tax situation is. You might want to talk to your accountant and see what kind of tax bracket you can anticipate being in. I think it's a really nice, steady fund. Again, munies behave a little differently from taxable funds. You're getting a little more diversified, you're getting some tax breaks. Obviously, the tax issues are influx these days, but I would talk to your accountant. I think this is a nice steady fund.
Benz: Those are core funds, the Fidelity fund and the T. Rowe Price fund. Now, let's talk about a fund that's a little more of a niche holding, you'd maybe want to hold a smaller position in it. That's Fidelity Floating Rate High Income.
Kinnel: That's right. What you get with bank loan funds like this one is, essentially no interest-rate risk because the coupons adjust with changes in interest rates. You are covered if there's a spike in interest rates, but you do get some credit risk because these are bank loans to companies and so there is some risk there. There's some liquidity challenges, and so, this fund in particular holds a meaningful amount in cash so that it's easier to manage inflows and outflows. That makes it on the more conservative end of bank loan funds. But again, I think, that's a reasonable way to go is, take on a little less credit risk, especially, this long into an economic expansion, I think it's good to be a little more cautious. We haven't had much interest-rate risk in a long time. Presumably there is still some scenario in which interest rates spike and this is a good fund to hold in that time.
Benz: The first three were all fixed-income picks. Now, let's take a look at an equity pick. First, let's talk about why investors in retirement want to be thinking about making room for international equity exposure as a part of their portfolios.
Kinnel: There's a common misperception that international equity is higher risk. And in fact, people across the world all think that the other markets are higher risk which doesn't really add up. I think it's a useful diversifier. Don't avoid foreign equities just because it sounds higher risk. I think it's still a worthwhile place to invest. By a lot of measures, foreign equities are cheaper than the U.S. right now. I would still pay attention to foreign equities and still have some money in there even in retirement.
Benz: The fund you are highlighting today is Causeway International Value. Its managers won our International Stock Manager of the Year award honors for 2017.
Kinnel: That's right. And it's rated Gold. So, needless to say, we really like this fund. It's run by Sarah Ketterer and Harry Hartford. They have been running it for about 15 years, since leaving Hotchkis and Wiley. Just a very good, solid value fund. I chose value just because value has been a little more out of favor than growth these days. It's contrarian in a couple of ways. Very solid, consistent value fund. A nice offset if you've got a lot of growth exposure these days.
Benz: Where does it stand in relation to the emerging versus developed markets question?
Kinnel: That's a great question, because it has no emerging-markets exposure. It's unusual in that way, too. If you want emerging-markets exposure, you'll have to get an additional fund. But they draw the line very clearly here. It's just a developed market fund.
Benz: Good to know. Russ, thank you so much for being here to share these picks today.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.