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Founded in 1907 as a messenger company in the United States, UPS has grown into a multi-billion-dollar corporation by clearly focusing on the goal of enabling commerce around the globe. Today, UPS has become the world's largest package delivery company and a leading global provider of specialized transportation and logistics services. Every day, the company manages the flow of goods, funds, and information in more than 200 countries and territories worldwide.

This is a report on the UPS Savings Plan. We will discuss 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 how participants in UPS Savings Plan can achieve reasonable investment results using asset allocation strategies.

Note that we used proxy funds to mimic the plan, as some of the funds are not available for us to analyze.

2010 Portfolios Performance

Strategic Asset Allocation ((NYSEARCA:SAA)) (buy and hold) portfolios did very well in 2010. This table compares an SAA benchmark Six Core Asset Index Fund plan with two standard benchmarks (S&P 500 Total Return and Vanguard 60/40 Balance Index).

Name 1 Year 3 Years 5 Years
Six Core Asset Index Funds Strategic Asset Allocation Growth 14% 2% 8%
VFINX (Vanguard (S&P 500) Index) 14% -2% 2%
VBINX (Vanguard Balance (60% stocks/40% bonds) 9% 1% 4%

Tactical Asset Allocation (TAA) portfolios also performed well:

Name 1 Year 3 Years 5 Years
Six Core Asset Index Funds Tactical Asset Allocation Growth 10% 10% 16%
VFINX (Vanguard (S&P 500) Index) 14% -2% 2%
VBINX (Vanguard Balance (60% stocks/40% bonds) 9% 1% 4%

2010 was a good year for equities - especially in the US, and 2011 has started with risk chasing evident. Despite this, we may see a subdued market as stocks are not cheap. Investors should keep a cool head and manage their portfolios systematically.

Plans with access to emerging markets, real estate and commodities are likely to benefit along with the assumed staple of US equities. Plans will also want to have an array of bond choices, as the current market conditions challenge established assumptions as to what is safe.

The UPS 401K plan consists of 22 funds. These funds enable participants to gain exposure to 4 major assets: US Equity, Foreign Equity, REITs, Fixed Income.

The list of minor asset classes covered:
Emerging Markets Bond: PCY
Foreign Large Blend: EFA, VEU, GWL, PFA
Inflation-protected Bond: TIP
Intermediate-term Bond: AGG, CIU, BIV, BND
Large Blend: IVV, IYY, IWV, VTI, VV, SPY, DLN, RSP, SCHX
Mid-cap Blend: IJH, IWR, JKG, VO, MDY, EMM, PJG, DON, EZM, MVV
Real Estate: IYR, ICF, VNQ

Retirement Income:
Small Blend: IJR, IWM, JKJ, VB, DSC, PJM, DES, SAA, UWM, SCHA
Target Date 2000-2010: TZD
Target Date 2011-2015: TZE
Target Date 2016-2020: TZG
Target Date 2021-2025: TZI
Target Date 2026-2030: TZL
Target Date 2031-2035: TZO
Target Date 2036-2040: TZV
Target Date 2041-2045:
Target Date 2050+:

Asset Class Number of funds
Balanced Fund 10
REITs 1
Fixed Income 4
Commodity 0
Sector Fund 0
Foreign Equity 1
Emerging Market Equity 0
US Equity 3
Other 3
Total 22

Four asset classes is good. The use of index funds is good. More choices in all classes would likely improve returns. Adding emerging markets would also likely increase returns.

As of Jan 7, 2011, this plan investment choice is rated as average based on our Plan Rating methodology that was designed to measure how effective a plan's available investment funds are. It has the following detailed ratings:

Diversification -- Rated as above average (84%)
Fund Quality -- Rated as below average (24%)
Portfolio Building -- Rated as above average (73%)
Overall Rating: average (62%)

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 4 asset SIB (Simpler Is Better) plan. This SIB plan has the following candidate index funds and their ETF equivalents:

US Equity: SPY or VTI
Foreign Equity: EFA or VEU
REITs: IYR or VNQ or ICF
Fixed Income: AGG or BND

Performance chart (as of Jan 7, 2011)

click to enlarge

Performance table (as of Jan 7, 2011)

Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
UPS Savings Plan Tactical Asset Allocation Moderate 15% 105% 9% 93% 10% 91%
UPS Savings Plan Strategic Asset Allocation Moderate 9% 66% 1% 3% 3% 7%
Four Core Asset Index Funds REITs Tactical Asset Allocation Moderate 7% 54% 6% 60% 9% 75%
Four Core Asset Index Funds REITs Strategic Asset Allocation Moderate 10% 78% 3% 13% 5% 18%

Currently, US Equity, Commodities and Real Estate are doing well. US Equity and Real Estate are available to UPS Savings Plan participants.

This plan matches the benchmark and delivers solid returns over the five year horizon.

To summarize, UPS Savings Plan participants can achieve the best investment returns by adopting asset allocation strategies that are tailored to their risk profiles.

The UPS Savings Plan could consider reviewing their existing fund balance and adding an additional asset class.

Source: United Parcel Service Delivers a Solid Retirement Plan