Well, this is interesting. Ever wonder about the vino the staff swills at Wine Spectator, or the stogies Cigar Aficionado publishers like to smoke? Morningstar’s own “Fund Spy,” Russell Kinnel, pops the hood for his periodic peek at the 401(k) choices the Chicago-based research firm offers its employees.
Active, passive, large-cap, small-cap, domestic, emerging market—it’s about what you’d expect if you follow Morningstar’s rankings, but with a few surprises (three PIMCO choices, really?).
“We look for funds that should stand the test of time,” Kinnel writes. “In fact, more than half have been in the plan for more than 10 years. Two of them even predate my start date at Morningstar 20 years ago. We want funds that fit together well, though we do build in some redundancy in order to let employees make their own choices. It isn’t designed for employees to own one of everything.”
He adds that they look include “the same things any long-term investor should: stable management, a sound strategy, low expense ratios, and strong stewardship. We also seek out funds that tend to be on the less risky side of their Morningstar Category. Even though a 401(k) is a long-term investment, experience shows that investors in 401(k)s have a hard time making the most of high-risk funds. They buy after the funds have gone up and sell at just the wrong time. And, of course, our 401(k) funds have to be Morningstar Medalists.”
Claiming that firm’s fund selections are cheaper (we would hope so) and from a wider array of fund companies than the typical plan, he divulges the following:
American Funds New World
Kinnel notes it’s “a fund designed to make emerging markets more palatable to the average fund investor.” It regularly has half emerging-markets equities and half developed-markets stocks.
American Funds Washington Mutual
Here’s a name we haven’t heard in a while (talk about headline risk). The fund “aims to beat the S&P 500’s dividend yield, and 90% of the companies it owns must come from the S&P 500. All companies must meet the listing requirements of the New York Stock Exchange.”
DFA International Small Company
Can’t say we’re surprised to see the passive management evangelists in there. “There aren’t a lot of foreign small/mid-cap funds that are attractive and still open to new investors. With two large-cap foreign funds, we wanted a good diversifier that was predominantly small cap.”
Dodge and Cox International Stock
“I’m glad the firm closed this fund to new investors as it’s topping out at $70 billion these days,” Kinnel writes. “The strategy is a straightforward value process that leads management to buy good companies with falling valuations. What makes this a winner, though, is the depth of management and analysts.”
Harbor Capital Appreciation
“Jennison Associates may not be quite Dodge & Cox [ouch], but the experience and depth at this growth fund are still impressive. Although Sig Segalas is old enough to retire should he choose to do so [double ouch], he has the support of co-managers Kathleen McCarragher plus three more co-managers with an average tenure of 25 years.”
Loomis Sayles Bond
“Dan Fuss isn’t shy about taking on credit or currency risk, but he is quite savvy about finding good values before doing so. It’s a wide-ranging fund that goes into high-yield and foreign-currency debt whenever it sees attractive bonds.”
As for the rest? Kinnel lists the choices in similar fashion, which include:
Morgan Stanley Institutional U.S. Real Estate
Oakmark Select
Oppenheimer Developing Markets
PIMCO Commodity Real Return Strategy
PIMCO Real Return
PIMCO Total Return
Primecap Odyssey Aggressive Growth
Royce Special Equity
Selected American Shares
T.Rowe Price High Yield
T.Rowe Price Small-Cap Stock
Vanguard FTSE Social Index
Vanguard Institutional Index
Vanguard International Growth
Vanguard Selected Value
Vanguard Total Bond Market Index
Wasatch Small Cap Growth
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
