Active Management of ETF Model Portfolios

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Active Management of ETF Model Portfolios

Postby stemikger » Thu Jun 27, 2013 8:42 am

My 401K just added three EFT Model Portfolios by Morgan Stanley. I know absolutely know nothing about ETFs other than they are very inexpensive. We will not get all the detailed information on these model portfolios until July 1st, but so far from what they gave us they look very diversified and the asset allocation looks in line with what I have now with the most aggressive being 18% fixed income. The most conservative is 55/45 stocks/bonds and the one I'm looking at is 27% fixed income.

If these are reasonably priced, do you think it is a good idea to use one of these models for my 401K. Essentially they would act as a Target Retirement Fund ("All in one fund").

These portfolios were created by Morgan Stanley and combine active management of ETFs of several different asset classes in varying percentages to provide specific risk/return characteristics.

Typically, how much do these type of model portfolios cost? And for those of you who know about these are there any red flags I should look for if I decide to invest in them.

Here is how they invest in the Model 5 Portfolio (the one I'm considering)
Asset Class Model Target %
US Equity 44%
Large Cap Value 12%
Large Cap Growth 19%
Mid Cap Value 3%
Mid Cap Growth 4%
Small Cap Value 2%
Small Cap Growth 4%
International Equity 20%
International 14%
Emerging Markets 6%
Fixed Income 27%
Short Term Fixed Income 14%
Core Fixed Income 8%
High Yield Fixed Income 1%
International Fixed Income 2%
Emerging Markets Fixed Income 2%
Cash 9%
Source: Consulting Group, as of March 8, 2013. The target
percentages for individual asset classes contained in the model are
subject to adjustment from time to time as determined by Morgan
Stanley.

Here are the EFTs they use:
Source: Consulting Group, Morningstar Direct
The table below lists the ETFs selected by Morgan Stanley to match the asset classes contained
in the model portfolio.* The ETFs chosen are reviewed on an ongoing basis both to ensure that
they continue to meet Morgan Stanley Wealth Management’s rigorous research and evaluation
standards and to confi rm that they remain appropriate for the portfolio given any changes to
the asset allocation model or other funds in the portfolio.
Source: Consulting Group, March 2013. Subject to change.

* The cash allocation for the model is implemented using the INVESCO Portfolio Money Fund (IPPXX), a money market fund.
asset class exchange-traded fund ticker symbol

US Equity
Large Cap Value iShares Russell 1000 Value Index Fund IWD
Large Cap Growth iShares Russell 1000 Growth Index Fund IWF
Mid Cap Value iShares Russell Mid Cap Value Index Fund IWS
Mid Cap Growth iShares Russell Mid Cap Growth Index Fund IWP
Small Cap Value iShares Russell 2000 Value Index Fund IWN
Small Cap Growth iShares Russell 2000 Growth Index Fund IWO

International Equity
International Vanguard Europe Pacifi c Fund VEA
Emerging Markets Vanguard Emerging Markets Fund VWO

Fixed Income
Short Term Fixed Income Vanguard Short Term Bond Bond Fund BSV
Core Fixed Income Vanguard Total Bond Market Fund BND
High Yield Fixed Income SPDR Barclays Capital High Yield Bond Fund JNK
International Fixed Income SPDR Barclays Capital International Treasury Bond Fund BWX
Emerging Markets Fixed Income iShares JP Morgan USD Emerging Markets

Thanks.
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Re: Active Management of ETF Model Portfolios

Postby MN Finance » Thu Jun 27, 2013 9:02 am

I don't know that I would call it "active ". My guess is that its quite passive with all activity being rebalancing with fund flows. That said, it depends entirely on price. The fact that etfs are cheap means nothing once MS wraps their costs around it. I imagine it will look just like other all in one funds in 401ks. Let us know the price. My guess is 100bps over the etf costs
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Re: Active Management of ETF Model Portfolios

Postby pkcrafter » Thu Jun 27, 2013 9:42 am

The ETFs aren't there for you to select, they are in a "managed" portfolio, and I suspect you may have to pay the cost of the ETFs plus a cost for the "managed." See if you can find the total cost of owning one of the "managed" portfolios.

Paul
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Re: Active Management of ETF Model Portfolios

Postby stemikger » Thu Jun 27, 2013 10:00 am

Thanks guys. I'll get the cost July 1st and post it here.
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Re: Active Management of ETF Model Portfolios

Postby mage_ou » Fri Jun 28, 2013 11:18 pm

Target Date funds (and investing) that systematically move from one mix of equities-bonds to a higher mix of bonds + a lower mix of equities, are more volatile than an alternate investment strategy that just picks your overall risk tolerance for life. It is less risky to use the same allocation of equities-bonds your entire investing career than to start with higher equities and end with lower equities.
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Re: Active Management of ETF Model Portfolios

Postby nedsaid » Fri Jun 28, 2013 11:43 pm

This might be a good product.

If they charge a low fee and pretty much keep everything rebalanced, I would think about it. If they are trying to market time sectors or asset classes, I would pass. If the expenses are not low, I would pass.

They have the pizza sliced in a whole lot of slices. I am reminded of the Yogi Berra quote where he told someone to slice the pizza in four slices since he wasn't hungry enough to eat six. The pizza tastes the same no matter how many slices it is cut into.

I don't see a strategy here. It looks like they are recreating the broad indexes (maybe overweighting a sector here and there) with higher costs.

If you have index funds available, you could do that and do the rebalancing yourself.
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Re: Active Management of ETF Model Portfolios

Postby stemikger » Sat Jun 29, 2013 4:32 pm

nedsaid wrote:This might be a good product.

If they charge a low fee and pretty much keep everything rebalanced, I would think about it. If they are trying to market time sectors or asset classes, I would pass. If the expenses are not low, I would pass.

They have the pizza sliced in a whole lot of slices. I am reminded of the Yogi Berra quote where he told someone to slice the pizza in four slices since he wasn't hungry enough to eat six. The pizza tastes the same no matter how many slices it is cut into.

I don't see a strategy here. It looks like they are recreating the broad indexes (maybe overweighting a sector here and there) with higher costs.

If you have index funds available, you could do that and do the rebalancing yourself.


Yeah, the first thing I thought was wow, this is diversification overload, but this is coming from a guy who has The Vanguard Institutional Index Fund and Ishares Core Total U.S. Bond Market ETF for my entire portfolio. I am really curious to see how much they will be charging. I have to wait until July 1st for that.

Also, although this is meant to be a one fund holding it looks like they stick with the static asset allocation like the lifestyle funds do. So whatever model I pick would be like that until I chance to another model.
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Re: Active Management of ETF Model Portfolios

Postby Grt2bOutdoors » Sat Jun 29, 2013 5:54 pm

What is the need for cash in a retirement portfolio? Are they using it to attempt to lower fixed income volatility or something else? BTW, anything MorganStanley or any other asset management firm offers or sells is intended with their best interests first, your's come last. If your current allocation has been working, why tinker with it now?
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Re: Active Management of ETF Model Portfolios

Postby Rick Ferri » Sat Jun 29, 2013 6:35 pm

How much are they charging for this mess? It's WAY to many funds meant to look sophisticated, but it's really nothing more than a total stock and bond portfolio.

You could do the same allocation with three low-cost Vanguard ETFs and earn a higher return (due to lower cost):

44% Vanguard Total Stock ETF (VTI)
20% Vanguard Total International Stock ETF (VXUS)
36% Vanguard Total Bond ETF (BND)

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Re: Active Management of ETF Model Portfolios

Postby MN Finance » Sat Jun 29, 2013 10:48 pm

Rick Ferri wrote:How much are they charging for this mess? It's WAY to many funds meant to look sophisticated, but it's really nothing more than a total stock and bond portfolio.

You could do the same allocation with three low-cost Vanguard ETFs and earn a higher return (due to lower cost):

44% Vanguard Total Stock ETF (VTI)
20% Vanguard Total International Stock ETF (VXUS)
36% Vanguard Total Bond ETF (BND)

Rick Ferri

Its a 401k so by definition its going to be higher cost than other options. Its not any more of a mess than every other fund of funds. But, yes its about cost. If they wrap 37bps around it, it will likely be a great option for the 401k (but they wont, itll be more like 100bps)
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Re: Active Management of ETF Model Portfolios

Postby stemikger » Sun Jun 30, 2013 1:10 am

Rick Ferri wrote:How much are they charging for this mess? It's WAY to many funds meant to look sophisticated, but it's really nothing more than a total stock and bond portfolio.

You could do the same allocation with three low-cost Vanguard ETFs and earn a higher return (due to lower cost):

44% Vanguard Total Stock ETF (VTI)
20% Vanguard Total International Stock ETF (VXUS)
36% Vanguard Total Bond ETF (BND)

Rick Ferri


Thanks weighing in Rick. Now I know I won't do something stupid. I thought it looked convoluted myself, but I wasn't sure.
I'll just keep things they way they are.

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