Investment Goal:
The overall objective of this portfolio is to earn a sustainable return by assuming average level risk over the period of 10 years. The eventual objective of this portfolio is to fund my post –retirement life, however, I am keeping the time horizon here up to 10 years for now as with me still being in a young age, I opt to assume average risk. However, in order to avoid payment of taxes on my cash inflows, I will solely be investing in mutual funds suitable for IRA investment
Investment Style:
Considering my average risk tolerance and investment period of 10 years, I plan to take an overall moderately aggressive approach while allocating my funds in the mutual funds. It is considerable that since. Some of the plans that suit my investment goals and style are:
a) Mid Cap Growth Funds
Funds under this asset class, invest in mid-cap stocks and are relatively at a higher risk than the large-cap stocks. Empirical research has proved that over the medium and long-term investment horizon,mid-cap funds have outperformed large-cap funds.
b) Balanced Funds
This fund will cater to the need of average risk and desire for moderate safety in my portfolio. A balance fund combine equity components, fixed income components and money market components all in one portfolio. These funds are suitable for investors assuming moderately aggressive investment approach
c) Sector Fund-Healthcare Sector
Sector based funds focus on a narrow segment of the market, typically carries above average level of risk and are more volatile than the funds offering broad market coverage. However, since my portfolio is well-balanced and because the healthcare sector in US is on bullish run, I assume that these funds will add capital gain to my portfolio.
d) Bond Funds
Typically used by investors seeking income growth, bond funds largely invest in fixed income securities such as mortgage backed securities, government bonds and municipal funds. The objective of including bond funds in my portfolio is to balance the risk opted for in mid-cap stocks and healthcare funds. Additionally, these funds will be a great source of income for my portfolio while keeping the overall risk of the portfolio at an average level.
International Funds
These funds are used for adding diversification to the portfolio and empirical research has consistently proved that international assets offers great diversification benefit.
Criterion:
Beta and R-Squared:
Since I have opted for moderately aggressive investment and average risk level, I will chose funds with beta close to 1 and R-square of greater than 40%. A higher R-square multiple assures reliability of the beta of the fund.
Low fee Funds:
With many mutual fund companies now offering no-load funds or low fee funds, I will meticulously search for only such funds and will refrain from investing in funds charging high fee structure. This will save my returns to an extent.
Expense Ratio’s
Only the funds with average or lower than the average expense ratio will be selected. A low expense ratio confirms the operational efficiency of the funds.
Fund’s Turnover Ratio
Funds with expense ratio lower than the average will be selected. This strategy is in alignment to my preference for an average risk profile over a medium term outlook of 10 years.
Funds Selected
Balanced Fund-Vanguard Balanced Index fund
General Information
A well diversified portfolio in a single fund
Managed by Joshua Barrickman, Christine Franquin and Paul Malloy
Maintains a standard 60/40 allocation in stocks and bonds, respectively, with marginal allocation in short-term reserves too
Objective of achieving a balanced growth in capital value and generating income for the investor
As of February, 2016, the fund had $25.60 billion as assets under management with investment in 12,23 holdings
Low fee structure and consistent approach in the investment
Portfolio Building Strategy
The Portfolio strategy is mostly passive in nature in terms of fund allocation and stock selection as fund manager does not make tactical trades and thus avoid high expense ratio. Presently, the expense ratio of the fund is 0.23, which is 73% less than the average expense ratio amongst the available balanced funds. Most important features of the fund is that while it initiate the fund building process on moderately conservative approach, it gradually grows more conservative as investor approach retirement. At present, the portfolio of the company consists of blue chip stocks such as Apple Inc., Exxon Mobil Corp., Microsoft Corp., Google Inc. and Johnson & Johnson. Highlighted below are the top 5 holdings of the fund in equity and bond class:
Important Qualities:
The fund is a great source of diversification as even though it follows 60% equity allocation, it still follows the U.S. Total Stock Market Index,which tracks almost every stock available in US market. At present, the fund holds 3360 stocks, including large cap, mid-cap and even micro-cap stocks, thus achieving a high level of diversification. Just like equity, even the fixed income asset class also follows a diversified approach as its tracks Barclays U.S. Aggregate Float Adjusted Bond Index
The 60 percent equity position follows the CRSP U.S. Total Stock Market Index, which tracks nearly every stock in the U.S. market and allows it to achieve a high level of diversification. The fund holds nearly 3,360 stocks, including a large number of micro-cap offerings. The fixed-income side of the portfolio also follows a passive approach, tracking the Barclays U.S. Aggregate Float Adjusted Bond Index.
The fund has been awarded a high rating by the majority of the analyst and research firms, and has earned annualized return of 7.64% over the past five years and 5.97% over the past decade, while the average risk level is categorized as ‘Below-average’’
b) Mid-Cap Growth Fund- T. Rowe Price Mid-Cap Growth Fund
General Information:
Started in the year 1992
Managed by Brian Berghuis
Seeks long-term capital appreciation by investing in mid-cap growth stocks
No-load fund and zero transaction fee
Portfolio Building Strategy
The fund is purely focused on attaining long-term capital appreciation and invest 80% of its net assets in stocks of mid-cap companies whose forecasted earnings are higher than the average. At times of stock selection, the fund only select companies whose market capitalization fall within the range of S&P MidCap 400 Index or the Russell Midcap Growth Index. Highlighted below are the top five holdings of the fund:
Important Qualities:
The fund has an expense ratio of 0.77, which is at par to the industry average.
The fund has a stringent policy relating to stock selection as it only includes well-managed medium-cap companies who have vintage presence, have an experienced team of managers and have a sustainable capital structure composition.
The fund has been rated with a ‘Buy’ recommendation by top analyst and research firms, and has earned annualized return of 11.2% during the past five years and 9% during the past ten years.
c) International Bond- T. Rowe Price Global Multi-Sector Bond Fund
General Information:
Founded in the year 2008
Managed by Steve Huber
Achieves high diversification with close to 50% allocation in international equities and bonds
Objective of providing high income to the investors along with potential for capital appreciation while building an environment of diversification
As of February, 2016, the fund was having assets under management worth $290.74 million
No load fund and zero transaction fees
Portfolio Building Strategy
The fund builds a broadly diversified portfolio consisting of domestic and international asset classes with the objective of generating high income and sustainable capital appreciation. In order to achieve its objective, the fund can invest up to 65% of its holdings in high-yield/high-risk securities and 50% allocation to non-US equities. The list of holding in funds includes domestic debt instruments, international debt instruments, government bonds, corporate bonds and even preferred stocks, both domestic and non-US. Highlighted below are top five holdings of the fund:
Important Qualities:
The fund has expense ratio of 0.88%
The fund has been rated with a 4-star rating by Morningstar, and has earned annualized return of 3.3% during the past five years.
The fund follows a flexible approach of portfolio construction and seeks opportunities for high income in both domestic and international markets
d) Bond Fund- Vanguard Long Term Treasury Fund
General Information:
Managed by Gemma Wright
No-load fund and zero transaction fee
Seeks to provide a sustainable level of income for the investors by investing in treasury securities
As of February, 2016, the fund was having assets under management worth $3.8 billion
Portfolio Building Strategy
The fund is used by investors for neutralizing the risks so assumed by them in their portfolio through other high risk investments. The fund invest 80% of its assets in US treasury securities including bills, notes and bonds issued by US treasury with the objective to provide sustainable income to the investors
Important Qualities:
The fund has an expense ratio of 0.20, which is 68% lower than the average bond funds
The fund has earned earned annualized return of 9.1% during the past five years and 7.1% during the past ten years
e) Sector Fund- Fidelity Select Health Care Portfolio
General Information:
Managed by Eddie Yoon
Founded in the year 1981
No-load fund and zero transaction fee
Seeks to generate capital appreciation by investing in companies of healthcare sector
As of February, 2016, the fund was having assets under management worth $7.39 billion
Portfolio Building Strategy
The fund seeks capital appreciation by investing in stocks of companies related to healthcare sector or medicines. The fund invest in stocks of both domestic and foreign healthcare companies, but only with securities listed in US. Higlighted below are top five holdings of the fund:
Important Qualities:
The fund use fundamental analysis and market as well as economic conditions to select stock for the the fund
The fund has expense ratio of 0.74% and is at par to the industry average
The fund has earned return of 19.99% over the past five years and 12.02% over the past decade
References
Fidelity® Select Health Care FSPHX . n.d. http://www.morningstar.com/funds/XNAS/FSPHX/quote.html (accessed April 6, 2016).
Fidelity® Select Health Care Portfolio. n.d. https://fundresearch.fidelity.com/mutual-funds/summary/316390301 (accessed April 6, 2016).
Fidelity® Select Health Care Portfolio. n.d. http://money.usnews.com/funds/mutual-funds/health/fidelity%C2%AE-select-health-care-portfolio/fsphx (accessed April 6, 2016).
John Hancock Investments. Mid-Cap Stocks: Opportunities in the Heart of the Market. Research, John Hancock Investments, 2012.
T. Rowe Price Global Multi-Sector Bd Adv PRSAX . n.d. http://www.morningstar.com/funds/XNAS/PRSAX/quote.html (accessed April 6, 2016).
T. Rowe Price Global Multi-Sector Bond Fund. 2016. http://www3.troweprice.com/fb2/fbkweb/objective.do?ticker=PRSNX (accessed April 6, 2016).
T. Rowe Price Mid-Cap Growth RPMGX . n.d. http://www.morningstar.com/funds/xnas/rpmgx/quote.html (accessed April 6, 2016).
T. Rowe Price Mid-Cap Growth Fund. 2016. http://www3.troweprice.com/fb2/fbkweb/objective.do?ticker=RPMGX (accessed April 6, 2016).
US Money. T. Rowe Price Global Multi-Sector Bond Fund. 2016. http://money.usnews.com/funds/mutual-funds/world-bond/t.-rowe-price-global-multi-sector-bond-fund/prsax (accessed April 6, 2016).
—. T. Rowe Price Institutional Mid Cap Equity Growth Fund. 2016. http://money.usnews.com/funds/mutual-funds/mid-cap-growth/t.-rowe-price-institutional-mid-cap-equity-growth-fund/pmegx (accessed April 6, 2016).
—. Vanguard Balanced Index Fund. 2016. http://money.usnews.com/funds/mutual-funds/moderate-allocation/vanguard-balanced-index-fund/vbinx (accessed April 6, 2016).
Vanguard Balanced Index Fund. n.d. https://personal.vanguard.com/us/funds/snapshot?FundId=0301&FundIntExt=INT (accessed April 6, 2016).
Vanguard Balanced Index Inv VBINX . n.d. http://www.morningstar.com/funds/XNAS/VBINX/quote.html (accessed April 6, 2016).
Vanguard Long Term Treasury Fund. n.d. http://money.usnews.com/funds/mutual-funds/long-government/vanguard-long-term-treasury-fund/vustx (accessed April 6, 2016).
