Morningstar's Aggressive Retirement Portfolio: Not Really So Aggressive vs. Morningstar Alternatives

by: MyPlanIQ

Morningstar has recently produced an aggressive retirement portfolio. This is part of a series where they have a series of funds for which they provide a set of allocations depending on your time horizon.

In this article, we are going to critique the aggressive portfolio where they have stipulated the asset allocation.

Their retiree plan consists of 10 funds. These funds enable participants to gain exposure to 4 major assets: US Equity, Foreign Equity, Emerging Market Equity, Fixed Income.

ETF

%

Megacap (NYSEARCA:MGC) 27
Mid Cap (NYSEARCA:VO) 9
Small Cap (NYSEARCA:VB) 3
Foreign Equity (NYSEARCA:EFA) 9
Emerging Market (NYSEARCA:VWO) 1
TIPs Bond (NYSEARCA:TIP) 17
Short Term Bond (NYSEARCA:BSV) 9
Inflation Protected (NYSEARCA:WIP) 2
MBS Bond (NASDAQ:VMBS) 6
Corporate Bonds (NYSEARCA:LQD) 12
Cash 4
Click to enlarge

This can be summarized in major asset classes as:

Asset Class
Ownership
US Equities
39%
International
9%
Emerging Markets
2%
Fixed income
50%
Click to enlarge

The strategic asset allocation ownership will also remain constant:

Asset Class
Ownership
US Equities
17%
International
17%
Emerging Markets
16%
Fixed income
50%
Click to enlarge

This underweights the US and boosts International and especially emerging markets. Fixed income remains the same except the fixed income assets will be rotated depending on their price momentum.

Tactical asset allocation ownership will be dependent on asset class momentum on a monthly basis. Under most operating conditions, 50% will be fixed income and 25% will be designated to each of the top two asset classes -- unless they are underperforming fixed income, in which case it will become fixed income. If fixed income is underperforming cash, fixed income will move to cash

Asset Class
Ownership
US Equities
25% or 0
International
25% or 0
Emerging Markets
25% or 0
Fixed income
50, 75, 100
Click to enlarge

This portfolio is called aggressive by Morningstar but with this amount of assets in fixed income, we would qualify it as a moderate portfolio.

We are going to compare results of:

1. The portfolio as proposed by Morningstar
2, A strategic asset allocation portfolio using the funds proposed by Morningstar
3, A strategic asset allocation portfolio using the funds proposed by Morningstar
2, A strategic asset allocation portfolio using ETFs to clone the funds proposed by Morningstar for their own 401K plan
3, A strategic asset allocation portfolio using tETFs to clone the funds proposed by Morningstar for their own 401K plan

Portfolio Performance Comparison
Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Morningstar Retiree Aggressive Portfolio TAA 50 8% 78% 3% 27% 6% 44%
Morningstar Retiree Aggressive Portfolio SAA 50 17% 134% 1% 3% 4% 19%
Morningstar Aggressive Retirement Potfolio Original 13% 163% 3% 20%
Morningstar 401K ETF Clone TAA 50 13% 111% 7% 67% 11% 84%
Morningstar 401K ETF Clone SAA 50 15% 172% 3% 20% 5% 32%
Click to enlarge

The first thing to note is that the history on some of the ETFs prevent us from going back more than three years. As we go forward, we will get a better reading on the original portfolio.

In the other portfolios, a missing ETF is replaced by another asset class or fixed income but as the original was specific, we didn't report before all the ETFs were available.

Takeaways: As far as it goes back, the Morningstar portfolio performs reasonably well, however, the ETF clone of the 401K plan looks like it will outperform the proposed portfolio.

This portfolio is called aggressive -- designed for those who are risk aversed but with 20+ years time horizon. We think that with that length of time, reducing the fixed income component would make sense.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

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