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Chevron (CVX) claims to work in concert to provide the energy that drives human progress. Chevron has major operations in the world’s most important oil and gas regions. They are leaders in working in extremely difficult environments such as ultradeep water.

They have widespread businesses in managing and operating energy-creating enterprises, logistics operations to move energy around and chemical operations to enhance the use of energy consumption.

Their 401K plan consists of 17 funds. These funds enable participants to gain exposure to 3 major assets: US Equity, Foreign Equity, Fixed Income.

The list of minor asset classes covered:

Asset Class Number of funds
REITs 0
Balanced Fund 1
Fixed Income 3
Commodity 0
Sector Fund 0
Foreign Equity 2
Emerging Market Equity 0
US Equity 9
Other 2
Total 17

For such an advanced company, their retirement plan is vanilla at best. With three asset classes and very little choice of funds outside of US equities, the returns are going to be less than they could otherwise be.

Of particular note are the three fixed income funds, two of which are intermediate bond funds and the third is an intermediate government bond fund. With a wide range of alternatives available, this is a poor choice offered to participants.

As of January 14, 2011, this plan investment choice is rated as above 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 average (51%)
  • Fund Quality -- Rated as great (93%)
  • Portfolio Building -- Rated as average (58%)
  • Overall Rating: above average (66%)

On the other hand, credit is due for selecting good funds to make the most of what they have. The returns will be limited by having only three asset classes and not much choice in fixed income, but what they have chosen is good and so the rating is above average.

As we leave 2010 - a year that was great for equities - and move into an uncertain 2011, it is even more critical to properly diversify and respond to market changes. We offer two asset allocation strategies: strategic and tactical asset allocation strategies (SAA and TAA for participants in the CHEVRON EMPLOYEE SAVINGS INVESTMENT PLAN).

Strategic Asset Allocation is based on well known modern portfolio theory and its key features include: diversification, proper fund selection and periodic 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.

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:

Performance chart (as of January 14, 2011)

click to enlarge

Performance table (as of January 14, 2011)

Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
CHEVRON EMPLOYEE SAVINGS INVESTMENT PLAN Tactical Asset Allocation Moderate 3% 30% 7% 87% 8% 83%
CHEVRON EMPLOYEE SAVINGS INVESTMENT PLAN Strategic Asset Allocation Moderate 8% 78% 3% 22% 5% 28%
Three Core Asset ETF Index Funds Tactical Asset Allocation Moderate -2% -19% 2% 23% 4% 34%
Three Core Asset ETF Index Funds Strategic Asset Allocation Moderate 11% 77% 2% 8% 4% 17%

Currently Commodities, US Equity and Real Estate are doing well. Only US Equity is available to CHEVRON EMPLOYEE SAVINGS INVESTMENT PLAN participants.

This plan beats the three asset benchmarks by virtue of the US asset class choices. It would be a stronger plan with more fixed income choices and an additional asset class.

This plan would lose out to the four asset class benchmarks, and a top tier company like Chevron should be doing more to enable participants to enjoy higher returns.

Chevron would do well by their employees to consider reviewing their existing funds and adding an additional asset class.

Source: Chevron: Another Top Tier Company With a Second-Rate Retirement Plan