Analyzing Investment Portfolio: 401(k) Plan Case Study

Overall Allocation Analysis using Morningstar X-Ray

Section I: The Analysis 1. We can start analyzing the Overall Allocation of the 401(k) plan by using the X-Ray Overview section of Morningstar (located in the supplemental document titled: “Documents for the Case Study”) to answer the following questions: a. Does the current allocation of your friend’s 401(k) plan satisfy the desired overall allocation? Please explain your answer b. If it does not, what are the changes that should be made regarding the bond/stock allocation? In other words, is selling more bonds to buy more stock or the other way around the way to go? Note: Foreign Stocks are counted as “Equity”, and “Cash” can be counted toward “Bond” allocation c. Do you recommend eliminating any of the funds in the portfolio? Why or why not? Note: You will need to do some basic research on each of these fund companies. Remember to cite your sources. 2. A good percentage of the portfolio (roughly 20%) is invested in Tenet Healthcare (See the X-Ray Details: Asset Class Section). With the purpose of diversifying the portfolio, are you in agreement with this decision of investing heavily in the company? Why and why not? If you disagree, what would you recommend? (Cite your sources) 3. Using the section titled: X-Ray Details: Fees & Expenses (located in the supplemental document titled: “Documents for the Case Study”), answer the questions listed below. a. Compared to a similarly weighted hypothetical portfolio, is the average mutual fund expense ratio higher or lower? b. Which fund has the highest expense ratio? Why do you think it is so high? As always, please cite your reference(s). c. Which fund has the lowest expense ratio? (Excluding THC which has no expense ratio: It’s a Stock ) Why do you think it is low? As always, please cite your reference(s). 4. Now, let’s look at the allocation among different regions. In the “X-Ray Details: World Regions” section (located in the supplemental document titled: “Documents for the Case Study”). Answer the following questions: a. Compared to the desired World Region Allocation, should your friend invest more in the international markets? Please explain your answer in detail. b. Among the funds in your friend’s portfolio, which funds are heavily invested in the international market? Should your friend buy or sell more of these funds in order to meet the desired World Region Allocation? 5. Elsa has two bond funds in her portfolio: American Century, which is 100% low quality limited term bonds, and Fidelity short duration, which is 100% low quality limited term bonds. a. Based on the information in the “X-Ray Overview”, does your friend need to make any changes regarding the allocation of the bond funds based on style? Why? i. Your friend is looking for some high credit bond funds in order to replace the current ones. You can help find bond funds through Vanguard. Go to the website https://personal.vanguard.com/us/funds/vanguard and scroll down to look at “Bond funds”. Find two bond funds that still satisfy the desired bond “Allocation” and give at least 2 reasons why you chose those bonds. ii. Should your friend add municipal bonds to the portfolio? Why or why not? Would muni bonds have any advantages over the high-yield, low quality bonds she currently has? Please cite your references. 6. The last part of the analysis is the Stock Analysis. a. Based on information of the “X-Ray Interpreter” section (located in the supplemental document titled: “Documents for the Case Study”), compare the current Stock Allocation with the Wilshire 5000 (an index fund of stocks). Looking at the “Stock Style Diversification”, which asset class is heavily overweighed? b. In the “Stock Sector” area of the “X-Ray Overview Cont.”, you will find the information regarding the stock sectors that your friend invests in. What are the three main sectors that stocks are categorized in. In which sectors is the portfolio overweighed and under-weighed? What are some implications of the current allocations? Remember to cite your sources. Section II: Wrapping it all up In the final section of your case study please respond briefly to the following questions. Please note that this section will be graded based on completion so feel to give both positive feedback AND constructive criticism. 1. Which of the six unit projects was your favorite? Why? (Please write at least 3 sentences) 2. Think of one thing you have learned in class that you can apply in another class or another part of your life. What is it, and how can you apply it? (Please write at least 3 sentences) 3. How would you teach one thing you learned to your little brother or sister (even if you don’t have one)? (Please write at least 3 sentences)