Memorandum To: John and Jane Public From: Sean Maloney Re: Mutual Fund Recognition Date: February 25, 2011 Mr. and Mrs. Public, I would first like to thank you for giving me the opportunity to analyze mutual funds that would best suit your current situation. Mr. Public, my main intentions when analyzing these funds included your retirement, fiscal responsibility, low to medium risk tolerance, high long-term return preferences, and current income stability fondness. After careful consideration of your preferences, as well as your current financial status, I have selected the T. Rowe Price Retirement 2020 (TRRBX) mutual fund for your consideration. Let us first analyze arguably the largest factor for your choice in mutual funds, the retirement of Mr. Public. TRRBX is designed for individuals who plan on retiring between 2020 and 2025 and who will be turning 65 years old at this time. The fund emphasizes capital appreciation during the early stages of retirement asset accumulation, balances the need for income with the need for appreciation as retirement approaches, and focuses on income and stability once retirement has ensued. These funds also maintain substantial investment in equities, both prior to, and after the 2020 target date. Since you were looking to increase the stocks in your portfolio, this large investment in stock (72% currently) will help you achieve that goal. As said above, TRRBX will slowly convert to a higher percentage of bonds once retirement begins to add income and stability. The next factor to consider is fiscal responsibility. The alpha measurement, or the analysis of how well the manager has done versus the market value, of TRRBX is quite good, with a rating of 3.15%. This indicates that the manager of this fund (Jerome A. Clark) has done 3.15% better than the current market value of the fund. This is also 1.78% (3.15% - 1.37%) better than the average competing fund that contains similar assets. Along with fiscal responsibility comes the tolerance of risk, which you were eager to keep low to medium. This fund is one of the least risky because of its diversification. Since this mutual fund is comprised of seventeen other mutual funds, currently totaling 4,954 holdings, it is one of the most diversified mutual funds available. Because you are invested in such an outstanding amount of holdings, low risk is ensured and return is also likely. If we look at the beta for this fund, or the risk relative to the market as a whole, we see that TRRBX stands at 0.87%. Since the risk of the S&P 500 Index is stationary at 1.00%, TRRBX is less risky than the S&P 500, with a higher percentage of return.
This brings me to my next point, the high long term return of TRRBX. As you can see in Figure 1, TRRBX brings in a higher return, on average, than the S&P 500. In fact, the fund was 2.74 % (111.08% - 108.34%) stronger in the bull market of 09/30/2002 - 10/31/2007, and 7.4% (-51.07% - (-43.67%)) stronger in the bear market of 10/31/2007 - 02/28/2009, than the S&P 500. The five year return for Figure 1: TRRBX Return vs. S&P 500 Return this fund is also very positive. The total five year return averages 4.3%, beating the S&P 500 by a positive 2.2% (4.3% -2.1%), and beating other similar funds by a positive 2.9% (4.3% - 1.4%). Therefore, the value of a $10,000 investment would reach $12,326 in five years time. The past two quarters were also very strong for the fund. Quarter 3 of 2010 saw a positive total return of 10.77%, while Quarter 4 of 2010 saw a positive 7.87% return. Also, the past two years saw positive total returns of 14.74% in 2010 and 34.24% in 2009, a very strong performance compared to a negative 33.48% return during a recessionary 2008. However, 2008 was the only year that TRRBX saw a negative total return in its tenure. Finally, you have indicated that current income stability is important. The TRRBX offers a dividend yield of 1.64%, and is designed to provide income and principal stability throughout retirement. As stated above, you are also expected to receive a total average return of 4.272% in the next five years. Please note, while a 0.00% Management Fee exists in this fund, there is an Expense Ratio of 0.71%. This includes mutual fund operating expenses and management fees, expressed as an annualized percentage of total assets. Since your major concerns are met with this fund, let us now talk about the fund itself. TRRBX is a mutual fund which holds seventeen other Figure 2: Style Allocation of TRRBX T. Rowe Price Mutual Funds. This, as stated Style Allocation above, gives you 4,954 holdings, many more 24.02 % than could be achieved by buying stocks alone, Large Growth Large Value 26.13 % which, as you know, is the advantage of Small Growth 0.00 % buying a mutual fund. The fund currently Small Value 5.28 % invests 72% in stocks and 28% in bonds. The Foreign Stock 12.28 % style allocation of this fund is shown in Figure Emerging Market 6.93 % 2. This displays a hefty percentage of Precious Metals 0.00 % allocation in Large Growth and Large Value Intermediate Bond 7.05 % stock, as well as Foreign Stock. As you can Foreign Bond 9.30 % see, the allocation of this fund revolves around High Yield Bond 8.04 % the long-term investment.
In order for you to gain an even better understanding of the fund, I have provided a pie diagram of the exact mutual funds that are included in TRRBX’s Top 10 Holdings. As you can see in Figure 3, there is a strong emphasis with Figure 3: Top 10 Mutual Funds in TRRBX the T. Rowe Price Index and Income T.R.P. EQUITY INDEX 500 MUTUAL Fund mutual funds. Also, the T. Rowe TRRBX Top 10 Holdings FUND T.R.P. NEW INCOME FUND Price Growth Stock and Value Fund MUTUAL FUND T.R.P. GROWTH STOCK F MUTUAL mutual funds rank highly as well. Since FUND T.R.P. VALUE FUND INC MUTUAL there are seventeen total mutual funds in 15.28% 3.43% 18.30% FUND TRRBX, the last seven make up the T.R.P. EMERGING MARKE MUTUAL FUND 3.52% 15.28% of the “Other” category. T.R.P. INTL STOCK FUND MUTUAL 3.69% 3.70%
15.40%
FUND T.R.P. OVERSEAS STOCK F MUTUAL FUND T.R.P. INTL GR & INC FD MUTUAL FUND T.R.P. MID-CAP GROWTH MUTUAL FUND T.R.P. MID-CAP VALUE MUTUAL FUND OTHER (HOLDING #11 - HOLDING #17)
As the fund states, the investment “seeks the highest total return over time 4.00% 14.11% consistent with an emphasis on both 13.64% 4.93% capital growth and income.” From the preferences you have stressed to me, I see this fund as the best option for you in your current fiscal situation. The diversification, risk level, equity percentage, and current income stability of this fund encourages me to recommend TRRBX for your 401K investment. Please do not hesitate to contact me with any questions. Thank you. -Sean Maloney