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Chart all Schwab funds
June 2005
Schwab Press Release:
People who want to save for the future by investing in
a mutual fund linked to the date they intend to retire can now do so at Charles
Schwab & Co., Inc. Today, Charles Schwab Investment Management announced its new
Target Funds, a diversified set of five professionally managed mutual funds
designed to help investors achieve their retirement goals. Each is a "fund of
funds," investing in an underlying blend of equity and bond mutual funds geared
to a specific time frame. All are no-load funds, with no additional layer of
management fees charged by Schwab for its services.*
The Target Funds will invest in a combination of Schwab and Laudus Funds with
varying allocations based on retirement dates ranging from 2010 to 2040. The
Schwab Retirement Income Fund is designed for clients who are in retirement and
want current income with some potential growth from equities.
The new funds are in subscription through June 30, 2005, commencing operations
on July 1, 2005. During the subscription period, Schwab clients can invest in
the funds at an offering price of $10 per share.
"Only 50% of baby boomers are estimated to be accumulating enough to be able to
support their current standard of living during retirement years(1)," said
Evelyn Dilsaver, president of Charles Schwab Investment Management. "Many don't
have the time or expertise needed to create a sound investment portfolio and
successfully nurture it over time. Our Target Funds are a one-step solution for
people who want to 'set it and forget it.' You choose a fund based on your
retirement date, and Schwab's fund managers oversee the portfolios and keep them
on track."
Allocation Strategy Developed by Schwab Center for Investment Research
Extensive research by Schwab's Center for Investment Research (SCIR) has
determined the optimal diversification of funds by asset class, market
capitalization and international exposure as well as further diversification
through multiple management styles in each asset category. SCIR found that at
retirement, a moderate portfolio with about 60 percent in stocks, 35 percent in
bonds and 5 percent in cash offers the best risk-return trade-off. The funds
gradually decrease their equity holdings and increase fixed-income holdings as
investors approach and enter retirement. For investors in retirement, the Schwab
Retirement Income Fund focuses on providing current income along with
equity-growth potential.
The Schwab Difference
Schwab Target Funds will invest in Schwab-affiliated equity and bond funds,
according to the allocation strategy developed by SCIR. Assets in each of the
funds will be allocated among 10 different equity, fixed income and money funds
-- a smaller universe than most target funds, which helps keep the fund focused
while minimizing overlap.
The majority of the portfolios' domestic equity holdings will consist of funds
powered by Schwab Equity Ratings(R), the methodology behind Schwab's
industry-recognized equity model portfolio. Domestic funds include the Schwab
Core Equity, Dividend Equity and Small-Cap Equity Funds (all powered by Schwab
Equity Ratings), as well as the Laudus Rosenberg U.S. Large Cap Growth and U.S.
Discovery Funds. International equity exposure will be obtained through the
Laudus Rosenberg International Small Cap Fund, as well as the Laudus
MarketMasters International Fund.
The cash and short-term portion of the portfolio will be largely invested in
Schwab's YieldPlus Fund, recently recognized by Lipper and Morningstar in the
ultrashort bond category. Investments in the YieldPlus fund will seek to provide
higher yield potential for the portfolio, though with higher risk than a money
market fund. Longer-term fixed-income assets will be allocated to the Schwab
Total Bond Market Fund.
Fees for the Target Funds will be based on the select (or institutional) share
class of each underlying fund, providing investors with access to the
lowest-price eligible share class available at Schwab. Fund expenses are 98
basis points for the Schwab Target 2040 Fund, gradually decreasing to 70 basis
points for the Schwab Retirement Income Fund as the funds become more heavily
invested in fixed-income. No additional layer of management fees will apply*.
Each of the five funds is available for an initial investment minimum of $2,500
($1,000 for retirement accounts).
Complement to Schwab Managed Retirement Trust Funds for Retirement Plans
The new Target Funds for retail investors follow the successful launch of the
Schwab Managed Retirement Trust Funds(TM) in 2002, which are available to 401(k)
participants through Schwab Corporate Services. Unlike the new Target Funds,
which are comprised of Schwab Funds, these retirement plan funds are collective
trust funds sub-advised by independent money managers. With the launch of the
Target Funds, Schwab is making available the same type of easy-to-manage
retirement solution for retirement plan and retail clients alike.
Portfolio Management
Jeffrey Mortimer, senior vice president and chief investment officer for
equities at Charles Schwab Investment Management (CSIM), is responsible for
overall management of the funds. Mortimer oversees Schwab's equity index funds
and all Schwab funds and separate accounts based upon Schwab Equity Ratings. He
also manages the Laudus MarketMasters group of funds.
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August 2005
FastTrack Analysis and Opinion
What are Schwab Target Funds really about?
First, note that the entire short-history of Schwab Target funds as of this writing is
portrayed in the chart below. Schwab may change the way the funds operate in the future . .
. However, this would require a shareholder vote to change the fund objectives.
The chart shows all the Target funds. They all are very highly correlated with the
light blue New York Stock Exchange Composite index. An investor could achieve virtually the
same pattern by holding the Vanguard Total Stock Index Fund (VTSMX,) and a
money market
fund in a ratio like 80%=VTSMX, 20%=VMFXX,(Money Market). To gradually shift allocation as
you get older, an investor would specify that all dividends from VTSMX, be placed in
VMFXX,.
This gradually builds cash, decreases portfolio volatility, and
reduces tax consequences.
VTMSX and VMFXX also have annual expenses well below the projected Schwab Target Funds.
Projection of The Most Conservative Target Fund
Using information provided by Schwab we have constructed what we believe approximates
what the long term result of what SWBRX would have looked like had it existed over the past
16 years.
The red line is the Projected SWBRX. The green line is the actual Vanguard Wellington
fund. Note that Wellington beat the red line in return while have lower overall risk
(SD=2.76 vs SD= 3.25 )
The Bottom Line
We have no problem with anyone using Schwab Target funds. Returns will likely be average
and, over a longer period, appropriate for the Target age group.
What we do have a problem with is the press release. The section entitled "The Schwab
Difference" uses big words and corporate jargon to imply that Schwab is doing something
special or different for the investor, but, in truth, there is nothing special about this
strategy. Schwab Target Funds use a plain vanilla, simple, nothing-special indexing
strategy.
Further, the strategy of holding the NYSE and a low volatility yield fund takes no
advantage of diversification in both stocks and bonds more broadly . . . a skill
that has been long used widely by Vanguard (green line above) and other fund companies.
Paul Charbonnet
Investors FastTrack, August 2005 |
Kim Daifotis, senior vice president and chief investment officer for fixed
income, is responsible for the bond and cash-equivalent assets of the Target
Funds. Daifotis oversees all fixed-income funds for CSIM, including municipal,
taxable and money market funds.
About Schwab Equity Ratings
Schwab Equity Ratings provides an objective and powerful assessment of
approximately 3000 U.S. head-quartered equities, more than any other firm.
Stocks are assigned grades of A, B, C, D, or F, reflecting performance potential
over the next 12 months. Schwab's outlook is that "A"-rated stocks, on average,
will strongly outperform, and "F"-rated stocks, on average, will strongly
underperform the equities market over the next 12 months. The ratings assess
four broad categories: fundamentals, valuation, momentum, and risk. They are
updated each week to reflect new financial data and other information.
On average, Schwab Equity Ratings A-rated stocks outperformed the Dow Jones
Wilshire 5000 Composite Index in the 52-week period from May 3, 2004 through May
2, 2005. The average performance of all stocks rated A on May 3, 2004, through
the 52 weeks up to May 2, 2005 was 16.36% compared to a return of 6.60% during
that period for the Index. The average performance of all stocks rated F from
May 3, 2004 through the 52 weeks up to May 2, 2005, was -14.15%. For more
information on Schwab Equity Ratings, including performance details, how
performance was calculated, comparison of performance to benchmarks and
limitations of model performance, visit http://www.schwab.com/serperformance.
Schwab Equity Ratings Cohort Performance
Schwab creates five cohorts (defined as those stocks that received the same A,
B, C, D or F rating that week). Schwab calculates the total return for each
stock in each A, B, C, D and F rating cohort assuming a 52 week holding period.
All hypothetical buy and sell trades were assumed to take place at the stock's
closing price. Transaction costs such as brokerage commissions, fees or other
expenses have not been deducted from the total return calculations. Results
would have been lower if such costs were deducted. Any dividends incurred were
treated as non-interest bearing cash and not reinvested. The 52 week performance
for each Cohort is calculated as the equal weighted average of all the simple
total returns associated with each stock in that Cohort. The Dow Jones Wilshire
5000 Composite index is a capitalization weighted index of over 6500 stocks and
treats dividends as reinvested.
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Performance of a single stock or group of stocks within a Schwab Equity Ratings
model performance cohort can vary greatly from the performance of that cohort.
Investors would not likely be able to achieve the same performance as that
discussed for various reasons explained in detail on schwab.com.
Limitations of Model Performance:
For all model performance results, there are inherent limitations which
investors should understand. Unlike an actual performance record, simulated
results do not represent actual investment performance or trading. Since the
trades have not actually been executed, the results may have under- or
over-compensated for the impact, if any of certain market factors, such as the
effect of limited trading liquidity. No representation is being made that any
investor will or is likely to achieve results similar to those shown. The
results presented reflect past performance and should not and cannot be viewed
as an indicator of future performance.
The results shown are not an indicator of the returns a Schwab client would have realized or will
realize in relying on Schwab Equity Ratings or any stock list or model mentioned. Schwab Equity
Ratings and the lists or models mentioned are not personal recommendations for any particular
investor and do not take into account the financial, investment or other objectives and may not be
suitable for any particular investor. Before buying, investors should consider whether the
investment is suitable for themselves and their portfolio. Additionally, investors should consider
any recent market or company news. Stocks can be volatile and entail risk and individual stocks may
not be suitable for you. Indexes are unmanaged, do not incur management fees and expenses and cannot
be invested in directly.
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