​​​​Beginner Webinar Series: Join us on Friday, May 17th, at 2:00 pm EST for our weekly Beginner Series. This week, we will be focusing on understanding and utilizing the D.A.L.I. tool. Click here to register for the upcoming webinar. Note that this series is now hosted through Zoom. Participants will have the opportunity to ask questions.

While much of our research over the past few weeks has centered on the shift in market seasonality, the month of May holds another spot that is near and dear to many of our hearts - National Hamburger Month. While thoughts of hamburgers typically do not lead to conclusions on the economy, advancements in data availability have given us the opportunity to draw such conclusions through the Big Mac Index, which measures the average price for McDonald’s top-selling burger across various countries around the world.  First published by the Economist in 1986, the Big Mac Index can be used as another way to display purchasing power parity from country to country, as the burger is produced and served in a standard way in every McDonald’s restaurant (source: statista.com).  In the Index evaluation from January, the United States proved to have the fourth most expensive Big Mac in the world at an average price of $5.58, with the northern European countries of Switzerland, Norway, and Sweden making up the top three of the rankings.  Russia had the cheapest average price at only $1.65.  The top ten countries ranked by average Big Mac price are shown below, with the entire list available here.

source: statista.com

This consistency in production has attributed to the strength of McDonald’s Corporation MCD, as evidenced in the stock’s recent reversal back up into a column of X's to match its all-time high at $200.  MCD is a 4 for 5’er that has been in a positive trend since 2015 and currently ranks in the top half of the Restaurants sector RS matrix.  Monthly momentum just flipped positive, and the bullish price objective of $254 suggests the potential for further upside from here.  MCD also carries a yield of 2.32%.  As we approach Memorial Day weekend, those looking to celebrate National Burger Month without worrying about the calories may consider adding exposure to MCD at current levels, with initial support offered at $194, and further support at $174 and $170.

One thing that caught our attention recently was a Wall Street Journal Article entitled “What We’ve Learned About Target-Date Funds, 10 Years Later.” The article begins by discussing how many investors, who were close to retirement in 2008, and were invested in 2010 target-date funds, were taken by surprise when the target-date funds in which they had invested their retirement portfolio lost a substantial portion of their value during the financial crisis. For many of us, even if we don’t know the performance of specific 2010 target-date funds during the financial crisis, this is unsurprising as we now know, that 2008 shined a spotlight on one of the major defects of modern portfolio theory – the proclaimed benefits of diversification disappeared as previously uncorrelated assets suddenly became highly correlated as panic set in and investors looked to liquidate exposure to asset classes across the board. It goes on to say that since then, the amount invested in target-date funds has grown by $532 billion, largely due to investments by 401(k) plan participants. Our point here isn't to tear apart the method by which these funds are actually constructed and rebalanced – unexpectedly large drawdowns during 2008 were by no means restricted only to target-date funds and besides, the biggest problems with target-date funds are more fundamental than simply being too reliant on historical correlations, they lie within the target-date fund concept itself. 

Before we jump into the problems, it is worth pointing out, that despite their shortcomings, target-date funds are not without redeeming qualities. Well, maybe one redeeming quality, but, it is a significant one – they provide a default option for 401(k)’s and other retirement plans, many of which, thanks to the research of Richard Thaler and others, have moved to an opt-out instead of opt-in format in an effort to encourage their participants to save for retirement. And people who would not be putting aside money for retirement if they were automatically enrolled in a 401(k) plan and defaulted to a target-date fund are definitely better off than they otherwise would be. However, this does not mean we need to embrace these funds beyond this limited use case.

Similar to robo-advisors, target date funds are another way that some fund companies have attempted to usurp the role of the financial advisor. Essentially what target-date funds do is attempt to take all of the asset allocation work an advisor does for a client and boil it down to a one-size-fits allocation based on a single number – age. The further away the target-date is, the more risk-on the fund is, and as the target date draws closer, the fund’s allocation shifts to a “safer” allocation with greater weight in fixed income. Some of the problems here are immediately apparent. Aside from the questionableness of how safe these funds truly become even when they are very close to their target date, anyone who has actually prepared an asset allocation for a client can tell you trying to generate an optimal allocation based on nothing but age is a fool’s errand. Variables like income, marital status, and lifestyle all have a material impact on how a retirement portfolio should be allocated, but, of course, target-date funds factor in none of these considerations. Target-date funds also don’t take into account individual goals for retirement nor do they adjust to changing conditions. Perhaps a 30% fixed income allocation will allow you to reach your goals if bonds are yielding 5%, however, if bond yields are only 3%, the same allocation may not provide the return you need. But, target-date-funds stay the same whether your goal is to have $500,000 or $5 million and whether bonds are yielding 2% or 10%.

We’ve highlighted the shortcomings of target-date funds, but, as an advisor they also offer you an opportunity. Next time you’re talking to a prospect, ask them about their retirement plan, ask them if they have a target date fund. If they do, it offers a golden opportunity to explain the pitfalls of these funds, show them how you would create a more suitable allocation, and to talk about your methodology. In the past, we’ve also talked about the difficulties of connecting with millennial clients and with making your clients’ children into clients as well. Target date funds offer a great in-road for both. Next time you’re talking to a client with kids who are entering or are close to entering the workforce, ask them about their child’s retirement plan, ask them if they’re using a target-date fund. If they are, offer to put together a sample allocation that will better meet their needs – using the Fund Score system, you can quickly make selections from amongst their 401(k) menu and hopefully add them to your list of clients. You can use a similar approach for millennials who may not have many assets outside of their retirement plan yet, but, by offering to show them an alternative to the target-date fund in their 401(k), you’ll already have an established relationship with them down the road when they need more of the services you provide.

Running the Long Race with FSM Models

This business is often exposed to new products, new ideas, or new claims of being the “next best thing”.  While innovation leads us forward, the promise of going where no fund, product, or manager has gone before is an oft-repeated one.   You’ve been there before.  Things are “as presented” until they are not, at which point the same wholesaler (who might be at a new firm by now) calls you with the new “next best thing”.  Who can blame them?   There are very few shortcuts in this business and in life. As the fable goes, slow and steady wins the race.

We’re pleased to announce the addition of a new Fund Score Method (FSM) model:  The Tortoise & Hare 80-20.  Our “next big thing” introduces a Multi-Sleeve component to the FSM models, including the ability to maintain a strategic and dynamic asset allocation that fits in with your firm’s expectations.  Many of you have incorporated FSM models into your own “sleeves”, which by all accounts is still a winning strategy.  Tortoise & Hare creates guardrails by establishing minimum and maximum equity/fixed income allocations during “normal” markets, with a 20% allocation specifically reserved for both equity and fixed income exposure.  The CoreSolution Models, both US Core and All Cap World, serve as the designated allocation towards equities, with 10% of your total allocation going towards each model.  The Franklin Fixed Income Model and Vanguard Bond Market Fund VBMFX each get 10% of the total allocation as well to round out the 20% reserved for fixed income. The dynamic aspect of the model involves being fluid to reflect market conditions, as the flexible nature of the FSM models will overweighting equities or fixed income to fill the remaining 60%.  Additionally, the model sleeves have the ability to move entirely to cash by using the risk-triggers based on the US Equity Core Percentile and Money Market Percentile Rankings.

Master Model of:

• FSM CoreSolution US Core 2S PR4050: 10%
• FSM CoreSolution All Cap World 2S PR4050: 10%
• FSM American Funds 5S PR4050: 20%
• FSM American Funds 2S Model: 10%
• FSM WF-T Rowe Price 5S PR4050: 30%
• FSM Franklin Fixed Income ADV 2S PR4080: 10%
• VBMFX Vanguard Bond Market: 10%

By pairing multiple steadfast shop cultures, as well as the Core ETF selection, the Tortoise and Hare Model brings active and passive together into one deliverable and easy-to-implement package.  Diversification with a focused tilt creates the perfect vehicle for running the long race so that your new "next big thing" doesn't become your last.

Daily Option Ideas for May 16, 2019