RWO, RWR Replace VNQ in the Six Asset Portfolio

We are working through a series of articles to help improve returns for retirement investors. Aging boomers highlight the major retirement crisis as they come to the end of their working careers. They don't have enough money. There is no money to bail out retirement – it's already been spent on salvaging the economy for the working. It is going to be up to the individual to make the most of what they have. They will have to accept less or work longer or achieve better returns from their investments

We believe that it is possible for the individual to be more involved with their retirement investing and to see better results. These articles are intended to help build the foundational understanding that will enable better returns, lower risk and less angst in our lives.

What we have seen is:

• Increasing diversification from three areas to six can make a significant impact on simulated historical returns
• Only a few retirement plans (~4%) have six asset classes but  it may be possible to create a holistic portfolio with the combination of IRA and 401K plans
• We have added a managed bond fund in this critical area at a time when fixed income is under pressure and that part of the portfolio would benefit from active management. Note that we have picked what is probably one of the gold standards of recent years and not all managers are created equal
• The current set of funds we have developed are VTI, VEU, BND, VNQ, VWO, DBC, PTTDX
• We replaced VTI with LargeCap Blend RSP,  MidCap Value IJJ SmallCap Growth VBK
• VTI, VEU, BND, VNQ, VWO, (NYSEArca:  DBC), PTTRX, PTTDX,  RSP, IJJ, VBK,

In the last article we saw that adding three US ETFs in place of VTI didn't move the needle much. That doesn't mean that it is not valuable to have the funds, just that the market dynamics didn't show the benefit.It is likely that the benefits will be seen in future as SmallCap Growth are currently leading the US equities league table

In this article, we are going to focus on Real Estate Trusts. Anything with Real Estate in its name causes a visceral reaction as Real Estate was the notional straw that broke Wall Street's back and while the recovery is happening, we are not out of the woods. However, Real Estate Trusts are not consumer biased and they have been strong contributors to portfolios over the past year.

To keep the portfolio as small as possible, I am going to have two funds -- one domestic and one international.

U.S. REITs

The US REITs are ordered by they five year returns. While VNQ has the best five year return, it is at the bottom of the list over the past one year. ICF is attractive in the short term but has poor medium term performance. Therefore, I selected RWR as it has better short term properties and will likely be better going forward. Again, I am not an expert in researching likely forward looking returns, others may be.

International REITs

When we examine the international REITs, we see that they have a shorter history so they were sorted on the three year returns and RWO came out the clear winner.

My two picks are

• SPDR Dow Jones REIT RWR
• iSPDR Dow Jones Global Real Estate RWO

It is possible to make different selection and measure historical returns but these are the choices I make for this exercise and we will now review the historical returns against the previous version with just VNQ. Note that I have removed VNQ from the list of fund choices.

Attribute	Six Core Asset ETF Benchmark With PTTRX-3USETfs-2REIT	Six Core Asset ETF Benchmark With PTTRX-3USETFs
Diversification	above average (68%)	above average (65%)
Fund Quality	average (37%)	average (54%)
Portfolio Building	above average (80%)	above average (83%)
Overall Rating	average (64%)	above average (69%)

Performance chart (as of Mar 10, 2011)

Performance table (as of Mar 10, 2011)

Portfolio Name	1Yr AR	1Yr Sharpe	3Yr AR	3Yr Sharpe	5Yr AR	5Yr Sharpe
Six Core Asset ETF Benchmark With PTTRX-3USETfs-2REIT Tactical Asset Allocation Moderate	11%	82%	10%	79%	14%	96%
Six Core Asset ETF Benchmark With PTTRX-3USETfs-2REIT Strategic Asset Allocation Moderate	16%	128%	6%	28%	8%	38%
Six Core Asset ETF Benchmark With PTTRX-3USETFs Tactical Asset Allocation Moderate	13%	96%	11%	84%	14%	98%
Six Core Asset ETF Benchmark With PTTRX-3USETFs Strategic Asset Allocation Moderate	16%	124%	7%	31%	8%	40%

We have already noted that the graph is going to be misleading because of the youth of the ETFs. VTI and VNQ were available before RWO, RWR, RSP, IWS and IJT so, in the early days, we were comparing portfolios with different numbers of asset classes. We have also noted that VNQ beat RWR in the longer time horizon and RWO was not available in the five year horizon but only in the three year horizon.

Notes

• In the longer term there is no appreciable difference at least rounded up to the nearest whole percent
• In the three year time frame the plan with the extra funds beats the other by 1% over both strategic and tactical asset allocation
• In the short term, the simpler plan actually outperformed the plan with more funds which seems counter intuitive

We have already covered the limitations of momentum strategies and how that pertains to rotating sub-classes. The asset class rotation was not effective in the one year timeframe for Tactical asset allocation and the as both SAA and TAA will deploy both the REITs and their aggregate performance almost equal to VNQ so the SAA strategies are identical.

It is important to weigh the merits of historical performance which is past with the hope for future performance. The choices made here were with an eye to the future. International REIT will hopefully provide better diversification to minimize volatility and capture gains and the choice of the newer funds with better short term performance should hopefully give better returns. However, there is not a huge difference and it could be, for the sake of simplicity, one would want to keep this at one fund..

Disclosure:

MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Symbols:VTI,VEU,BND,VNQ,VWO,DBC,PTTDX,RSP,IJJ,VBK,EFA,RWO,RWR,(NYSEArca,VTI,),(NYSEArca,VEU),(NYSEArca,BND),(NYSEArca,VNQ),(NYSEArca,VWO),(NYSEArca, ,DBC),(MUTF,PTTRX),(MUTF,PTTDX),(NYSE,RSP),(NYSE,VBK),(NYSE,IJJ),(NYSE,EFA),(NYSE,RWR),(NYSE,RWO) ,

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