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This report reviews the CVS CAREMARK CORPORATION AND AFFILIATED COMPANIES retirement plan. We will discuss the investment choices and present our plan rating. Current economic and market conditions are discussed in the context of the investment portfolios in the plan. We will then show what participants in CVS CAREMARK CORPORATION AND AFFILIATED COMPANIES can achieve using asset allocation strategies.

Plan Review and Rating

The plan consists of 11 funds.

Set Class Ticker Name
Foreign Large Value TEMFX Templeton Foreign A
LARGE BLEND VINIX Vanguard Institutional Index
Small Growth VEXPX Vanguard Explorer
SMALL BLEND NAESX Vanguard Small Cap Index
MID-CAP BLEND VIMSX Vanguard Mid Capitalization Index
Foreign Large Blend VDMIX Vanguard Developed Markets Index
Intermediate-Term Bond PTTRX PIMCO Total Return Instl
WORLD STOCK RNPFX American Funds New Perspective R5
Intermediate-Term Bond SSBMX SSgA Bond Market
US EQUITY CVS CVS Caremark Corporation
Cash CASH Merrill Lynch Retirement Preservation Trust

There are four US choices (excluding company stock), three international choices, three fixed income choices.

It's our usual suggestion to not invest your retirement in the company's stock. Participate in an employee stock purchase scheme where you have a discount, otherwise go for more diversified choices.

These funds enable participants to gain exposure to 3 major assets: US Equity, Foreign Equity, Fixed Income. The list of minor asset classes covered:

This plan offers fair choices for each of the three asset classes, but it would be better to have more asset class choices.

Foreign Large Blend: EFA, VEU, GWL, PFA
Foreign Large Value: EFV, PID, DWM
Intermediate-term Bond: AGG, CIU, BIV, BND
Mid-cap Blend: IJH, IWR, JKG, VO, MDY, EMM, PJG, DON, EZM, MVV
Small Growth: IJT, IWO, JKK, VBK, DSG, PWT, RZG, UKK
World Stock: IOO, VT

As of Dec 3, 2010, this plan investment choice is rated as average based on our Plan Rating methodology that measures the effectiveness of a plan's available investment funds. It has the following detailed ratings:

Diversification -- Rated as below average (21%)
Fund Quality -- Rated as above average (69%)
Portfolio Building -- Rated as above average (69%)
Overall Rating: average (55%)

Current Economic and Market Conditions

2010 has been full of ups and downs -- plenty of worries on whether the US economy will climb out of the great recession and recover.

  • The Federal Reserve embarked on Quantitative Easing II (QE2) to stimulate the economy.
  • The housing market is still at its low but largely stabilized.
  • The unemployment rate is stuck at 9%.

With the high unemployment rate, large federal and local government debts and global trade imbalance all American's face uncertainties. With this backdrop, the stock and debt markets are going to be volatile. Despite this, markets have been resilient and appear positioned to rebound.

In this market it is even more critical to properly diversify and respond market changes. We offer two asset allocation strategies: strategic and tactical asset allocation strategies (SAA and TAA for participants in the CVS CAREMARK plan).

Strategic Asset Allocation is based on the well accepted modern portfolio theory with the key aspects being: diversification, proper fund selection and periodically re-balancing.

Tactical Asset Allocation works on a diversified array of assets provided by funds in a plan and adjusts asset mixes based on market conditions such as asset price momentum utilized by TAA.

Portfolio Discussions

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. For comparison purposes, we also include the moderate model portfolios of a typical 3 asset SIB (Simpler Is Better) plan. This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity: (SPY or VTI)
Foreign Equity: (EFA or VEU)
Fixed Income: (AGG or BND)

Performance chart (as of Dec 3, 2010)

click to enlarge

Performance table (as of Dec 3, 2010)

Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
CVS CAREMARK CORPORATION AND AFFILIATED COMPANIES Tactical Asset Allocation Moderate 8% 79% 7% 83% 8% 83%
CVS CAREMARK CORPORATION AND AFFILIATED COMPANIES Strategic Asset Allocation Moderate 14% 124% 3% 15% 6% 30%
Three Core Asset ETF Index Funds Tactical Asset Allocation Moderate -3% -27% 1% 10% 4% 28%
Three Core Asset ETF Index Funds Strategic Asset Allocation Moderate 10% 67% 0% -2% 4% 13%

Currently, asset classes in US Equity (SPY, VTI), Foreign Equity (EFA, VEU) and Fixed Income (AGG, BND) are doing relatively well. These asset classes are available to CVS CAREMARK CORPORATION AND AFFILIATED COMPANIES' participants.

To summarize, CVS CAREMARK CORPORATION AND AFFILIATED COMPANIES' retirement plan participants can achieve the best investment returns by adopting asset allocation strategies that are tailored to their risk profiles.

With an additional asset class (emerging markets, for example), the plan could deliver even better results to the participants. Participants who have left the company are recommended to look into an ETF based IRA plan with more asset classes that can potentially deliver higher returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.