When hiring active managers, some advisors look for the star rating on Morningstar rather than using the criteria TRG recommends. We believe that advisors and investors should focus on active managers who skillfully allocate capital to their best investment ideas. Passive investment options are widely available to investors who want market returns with low fees. Active managers must add value and act in clients’ best interests by allocating capital to attractive investments to increase risk-adjusted returns and justify fees. We propose an alternative method to the Morningstar rating system that we believe provides structure that protects downside while maintaining significant performance upside.
“Wide diversification is only required when investors do not understand what they are doing. Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”
– Warren Buffett, Berkshire Hathaway
We want Value managers that fit the following criteria. They are:
- At least 10 yr performance history
-
Low expense ratios.
-
A single manager or a clear lead manager because it demonstrates ownership of fund and avoids group think
-
Manager does not over diversify and is a best idea or focus fund
-
Ability to go to cash/high cash positions- Shows that a manager can wait for better ideas if none are available and is actively searching for the best opportunities
-
Consistently low P/E ratio on holdings (ex. S&P 500 P/E = 25)
-
Managers who eat their own cooking- meaning that they have their own money in their fund
-
Low turnover rate - demonstrates convictions in holdings
We will briefly cover each of the 8 criteria below:
1. Long term survivability: A minimum of 10 years of performance history gives us a long term look into how the manager performs through varying market cycles. We prefer to see at least one market crash and rebound to see how the manager reacts and makes their investment decisions.
2. Low cost of management: We expect low cost management of the fund just like we would expect low cost management for a company. The more value that can be driven from the fund the more profitable the fund is for its managers and its shareholders. High expense ratios can be one of the biggest drags on returns (see table below), but quality managers with low turnover and high conviction may be able to achieve over-performance at a lower cost.
Featured Video
Articles you may find interesting:
- Corporate Employees: 8 Factors When Choosing a Mutual Fund
- Use of Escrow Accounts: Divorce
- Medicare Open Enrollment for Corporate Employees: Cost Changes in 2024!
- Stages of Retirement for Corporate Employees
- 7 Things to Consider Before Leaving Your Company
- How Are Workers Impacted by Inflation & Rising Interest Rates?
- Lump-Sum vs Annuity and Rising Interest Rates
- Internal Revenue Code Section 409A (Governing Nonqualified Deferred Compensation Plans)
- Corporate Employees: Do NOT Believe These 6 Retirement Myths!
- 401K, Social Security, Pension – How to Maximize Your Options
- Have You Looked at Your 401(k) Plan Recently?
- 11 Questions You Should Ask Yourself When Planning for Retirement
- Worst Month of Layoffs In Over a Year!
*For illustrative purposes only, not indicative of any specific investment product.
3. Single Vision and Responsibility: Single managers, or a team with a clear lead manager, are less likely to be convinced and/or moved from their originating ideals. When a lead manager makes a decision he/she alone is responsible for that decision. When a committee of managers make a decision, it is difficult to place blame or praise (identify ownership) for an investment decision. Lead managers by definition have more riding on their decisions and thus spend more time during the due diligence portion of their investment hypotheses.
4. Does not Over-diversify: Volatility-aversion of investors and lack of in-depth research influence fund managers into creating over-diversified portfolios, diluting the alphas of their best ideas. This leads to the widespread underperformance of mutual funds compared to their benchmark indices after deducting the expenses and fees. Our definition of risk, defined as “permanent capital impairment”, forces us to disregard short-term volatility and focus on making the best investment decisions based on fundamental research.
“There is no sense diluting your best ideas or favorite situations by continuing to work your way down a list of attractive opportunities.”
-Joel Greenblatt, Gotham Capital
5. Holds cash when deals are unavailable: Good managers stay true to their ideals and hold fast when markets do not provide good investment opportunities. In elevated markets we see good value manager’s portfolios having increasing cash positions. When managers cannot find good companies to re-invest their capital into, they will hold cash because they are unwilling to deviate (drift) from their investment objective. For example, some fund families will not allow their managers to go to cash mandating that they stay fully invested at all times. This may force managers to buy into companies that they don’t feel as strongly about and may force them into buying a larger basket of investments. This dilutes the best ideas while their investors are often left paying a higher expense ratio due to additional trade and turnover costs.
6. Focus on finding “On Sale” companies: Value mangers are always trying purchase companies at a price that is lower than what their intrinsic value is. One way of identifying these companies is through the Price to Earnings Multiple. A low market price in relation to a company’s earnings signifies a cheaper price than if the market realized the company’s intrinsic value. In a white paper by Tweedy, Browne Co, they identified that (as a group) stocks with low valuations (P/E, P/B, and P/CF) and high dividend yield consistently outperform their counterparts over the long term.
7. Eat their own cooking: We place high importance on whether or not a manager has any of his/her own money invested along-side their shareholders. If the manager’s compensation is only tied to the size of the fund, there is little incentive to beat the benchmark and keep costs down. In fact, a study by Morningstar found that 85% of balanced-fund managers who succeed when having $1 million in their fund, versus 32% if no stake [4]. We find it hard to invest with a manager who does not believe in their own product.
8. High Level of Conviction: Low turnover signifies a high level of conviction in the positions within the fund. When a manager has low turnover he/she is not transitioning in and out of specific positions because he/she is confident in their research and investment hypothesis.
“It talked about a couple of studies, including the best-performing fund from 2000 to 2010, which was up 18% a year even when the market was flat. The average investor in that fund went in and out at the wrong times on a dollar-weighted basis to lose 11% per year. Meanwhile, the statistics for the top-quartile managers for that decade were stunning: 97% of them spent at least three of those 10 years in the bottom half of performance, 79% spent at least three years I the bottom quartile, and 47% spent at least three years in the bottom decile.”
-Joel Greenblatt, in reference to his book The Big Secret for the Small Investor during an interview with Barron’s.com
Our proposed alternative to the star rating system is simple, easy to use, and is based on methods that have been proven to work.
How does the Intel Pension Plan define the eligibility criteria for employees looking to retire, and what specific steps must they take to determine their benefit under the Intel Pension Plan?
Eligibility Criteria for Retirement: To be eligible for the Intel Pension Plan, employees must meet specific criteria, such as age and years of service. Benefits are calculated based on final average pay and years of service, and employees can determine their benefits by logging into their Fidelity NetBenefits account, where they can view their projected monthly benefit and explore different retirement dates(Intel_Pension_Plan_Dece…).
What are the implications of choosing between a lump-sum distribution and a monthly income from the Intel Pension Plan, and how can employees assess which option is best suited for their individual financial circumstances?
Lump-Sum vs. Monthly Income: Choosing between a lump-sum distribution and monthly income under the Intel Pension Plan depends on personal financial goals. A lump-sum provides flexibility but exposes retirees to market risk, while monthly payments offer consistent income. Employees should consider factors like their financial needs, life expectancy, and risk tolerance when deciding which option fits their situation(Intel_Pension_Plan_Dece…).
In what ways can changes in interest rates affect the lump-sum benefit calculation under the Intel Pension Plan, and why is it essential for employees to be proactive about their retirement planning concerning these fluctuations?
Interest Rates and Lump-Sum Calculations: Interest rates directly affect the lump-sum calculation, as higher rates reduce the present value of future payments, leading to a smaller lump-sum benefit. Therefore, it's crucial for employees to monitor interest rate trends when planning their retirement to avoid potential reductions in their lump-sum payout(Intel_Pension_Plan_Dece…).
How do factors like final average pay and years of service impact the pension benefits calculated under the Intel Pension Plan, and what resources are available for employees to estimate their potential benefits?
Impact of Final Average Pay and Years of Service: Pension benefits under the Intel Pension Plan are calculated using final average pay (highest-earning years) and years of service. Employees can use available tools, such as the Fidelity NetBenefits calculator, to estimate their potential pension based on these factors, giving them a clearer picture of their retirement income(Intel_Pension_Plan_Dece…).
How should employees approach their financial planning in light of their Intel Pension Plan benefits, and what role does risk tolerance play in deciding between a lump-sum payment and monthly income?
Financial Planning and Risk Tolerance: Employees should incorporate their pension plan benefits into broader financial planning. Those with a lower risk tolerance might prefer the steady income of monthly payments, while individuals willing to take investment risks might opt for the lump-sum payout. Balancing these decisions with other income sources is vital(Intel_Pension_Plan_Dece…).
What considerations should Intel employees evaluate regarding healthcare and insurance needs when transitioning into retirement, based on the guidelines established by the Intel Pension Plan?
Healthcare and Insurance Needs: Intel employees approaching retirement should carefully evaluate their healthcare options, including Medicare eligibility, private insurance, and the use of their SERMA accounts. Considering how healthcare costs fit into their retirement budget is crucial, as these costs will likely increase over time(Intel_Pension_Plan_Dece…).
How can employees maximize their benefits from the Intel Pension Plan by understanding the minimum pension benefit provision, and what steps can they take if their Retirement Contribution account falls short?
Maximizing Benefits with the Minimum Pension Provision: Employees can maximize their pension benefits by understanding the minimum pension benefit provision, which ensures that retirees receive a certain income even if their Retirement Contribution (RC) account balance is insufficient. Those whose RC accounts fall short will receive a benefit from the Minimum Pension Plan (MPP)(Intel_Pension_Plan_Dece…).
What resources does Intel offer to support employees in their retirement transition, including assessment tools and financial planning services tailored to those benefiting from the Intel Pension Plan?
Resources for Retirement Transition: Intel provides several resources to support employees' transition into retirement, including financial planning tools and access to Fidelity's retirement calculators. Employees can use these tools to run scenarios and determine the most beneficial pension options based on their financial goals(Intel_Pension_Plan_Dece…).
What strategies can retirees implement to manage taxes effectively when receiving payments from the Intel Pension Plan, and how do these strategies vary between lump-sum distributions and monthly income options?
Tax Strategies for Pension Payments: Managing taxes on pension payments requires strategic planning. Lump-sum distributions are often subject to immediate taxation, while monthly income is taxed as regular income. Retirees can explore tax-deferred accounts and other strategies to minimize their tax burden(Intel_Pension_Plan_Dece…).
How can employees of Intel contact Human Resources to get personalized assistance with their pension questions or concerns regarding the Intel Pension Plan, and what specific information should they be prepared to provide during this communication?
Contacting HR for Pension Assistance: Intel employees seeking assistance with their pension plan can contact HR for personalized support. It is recommended that they have their employee ID, retirement dates, and specific pension-related questions ready to expedite the process. HR can guide them through benefit calculations and options(Intel_Pension_Plan_Dece…).