Robert J. Martorana, CFA
Portfolio Manager
Right Blend Investing, LLC
Robert.Martorana@gmail.com
Cell: 201-919-2395

Mr. Smith has a well-balanced portfolio, given the options available in his 401(k) plan. The portfolio has 50% in stocks, 40% in bonds, and 10% in cash. This may be suitable for retirement, depending on Mr. Smith’s overall financial situation and his investment goals. Without discussing these issues in detail, it is only possible to make general observations.

Below are two questions for discussion:

• Page 3 of his statement shows Mr. Smith’s fund selections, along with other funds offered by the 401(k) at his employer. Are these all of the funds offered in his 401(k)? The plan does not appear to offer any commodities, precious metals, or inflation-protected bonds. These are all asset classes which I now favor, but Mr. Smith does not appear to have these options in his 401(k).
• Mr. Smith has a high weight in technology. Is this a deliberate choice? Is it long-term or tactical? If he wants high growth, would he consider biotech or emerging markets?

Suggestions:

• Move from bonds to cash: The 401(k) retirement plan offers an interest rate of 4.0% on what it calls “Stable Value/Cash” (according to the comments on the bottom of page 2). I recommend that Mr. Smith move his bond holdings into this option after confirming the yield with his employer. This would boost his cash allocation from 10% to 50%, a move that would increase yield while reducing interest rate risk. The potential downside of this shift is underperformance if interest rates fall, a possibility that I do not expect.
• Keep a high weight in cash: My recommendation for a 50% allocation to cash is unusually high for an investment portfolio, but this reflects the following considerations:

1. The cash product offers a 4% return, an unusually attractive rate in today’s environment. This is why I would suggest rolling the bond allocation into the cash product offered by his employer, a stable firm with a favorable outlook.
2. The 401(k) plan has very few choices that offer an inflation hedge. Since commodities and precious metals are not an option, the portfolio can get inflation protection through its position in cash.
3. I recommend that all clients consider a reduced allocation to equities, since I expect stocks to generate low returns and high volatility.
• Evaluate other financial holdings: I don’t know what other financial assets Mr. Smith has, but he may be able to use these funds to buy dividend stocks, inflation-protected bonds, emerging markets, commodities, and precious metals. I now recommend these asset classes for most portfolios, though the specific mix depends on each client’s goals.  Since these options are not available in his 401(k) plan, it may be possible for Mr. Smith to invest other funds in these asset classes.
• Reduce Costs:
  1. Consider an IRA: The fund administrator charges 1.25% for administering this 401(k) plan, according to the notes on the bottom of page 3. This is not unusual, but it is not cheap. If Mr. Smith’s employer is offering to match funds, then he should maximize contributions to this 401(k). But if his employer is not matching his contributions, then an IRA or Roth IRA may make sense. 
  2. Keep Fund America Large Cap; Sell Oppenheimer: Two of the large-cap funds Mr. Smith owns, Fund America and Oppenheimer, have expense ratios of 70 basis points and 100 basis points respectively. This compares to just 25 basis points on the S&P Index fund he owns. Large-cap U.S. stocks tend to be a very efficient asset class, so an index fund makes a lot of sense. According to the attached document, the Oppenheimer Fund is not particularly attractive. Meanwhile, Fund America is a dividend fund, which I now favor. So I would keep Fund America and sell Oppenheimer (adding to the S&P Index Fund).  
  3. Sell Janus: The Janus Technology fund is VERY expensive at 160 basis points. This is not a highly ranked fund based on its past performance, and more than 10% of the assets are invested in just Apple and Google. I think Mr. Smith should consider a technology ETF, possibly using his funds outside of his 401(k). Right now, this fund is costing him 125 basis points in administrative costs plus 160 basis points in expense ratio. That’s a total of 285 basis points, so this fund would have to beat its index by almost 3% just to break even.
  4. Keep the other funds: Janus Small Cap Value: The expense ratio is 140 basis points, but it has a very good track record.  The Fidelity fund costs 60 basis points, and offers a mix of stocks and bonds. It has a moderate track record, but it is hard to evaluate given the fund’s mandate. The T. Rowe Price Global fund costs just 65 basis points, has a decent track record, and offers important exposure to opportunities overseas.

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Robert J. Martorana, CFA
Portfolio Manager
Right Blend Investing
Cell:  201-919-2395
Robert.Martorana@gmail.com


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