Morningstar Advisor - Summer 2007 - 16

Gray Matters company match rate of 3%, needs to contribute 4.9%. If pensions or other incomes will be available in retirement, you can further reduce the savings rate. Overall, according to the Ibbotson study, meeting retirement goals is possible with reasonable savings rate. Not surprisingly, there is a premium on starting early. Those who do save early can save without a significant impact on their lifestyles. A critical inflection point, however, occurs at age 35 to 40. The study shows that the recommended savings rate for investors starting to save at age 25 typically more than doubles if they wait until age 45 to start saving, and triples if they wait until age 55 to start. Since the markets, governmental health and retirement programs, and individuals’ personal circumstances are ever changing, this savings guideline should be considered just that— a guideline. Advisors and their clients should monitor their progress and check back with the guideline periodically to adjust their savings rate to ensure they’re on track to reach their retirement goals. K Too Many Oranges Hedge fund managers often wrongly categorize their strategies, making apple-to-apple evaluations difficult. by John Rekenthaler In most hedge-fund databases, including Morningstar’s, funds supply their peer groups by selecting from a list of available investment categories. This system of self-categorization differs from what is done with mutual funds, which are placed into peer groups by the database company, sometimes over the noisy protests of fund managements. This discrepancy occurs because unlike with mutual funds, which have publicly available data on portfolio holdings mandated by the SEC, no outside party has systematic access to the portfolio holdings of hedge funds. In the absence of such information, it is understandable that most databases rely on hedge funds to provide their own, self-selected categories. Such a process raises questions about consistency. Do all hedge funds use the same descriptors in similar fashion? Or are there differences in interpretation among the hedge funds that can lead to (broadly) similar funds being placed into different categories? A simple way of answering these questions is to examine the return patterns of the funds, testing them against readily definable expectations. For example, one might study the relationship between a long-only U.S. stock fund and the performance of the S&P 500 index. If the two items tend to move in unison, we can say with some assurance that the fund is probably as advertised. If on the other hand, the allegedly long-only U.S. stock fund consistently drops when the S&P 500 rises, we can comfortably call that a mis-categorization. For this study, we examined the monthly returns of four equity hedge-fund categories: equity net long, equity net short, equity market neutral, and equity variable. By restricting ourselves to U.S.-based equity categories, as opposed to categories that must be modeled by a more complex set of risk factors, we were able to establish simple but reliable tests to This article is based on a new study by Roger Ibbotson, Ph.D, Peng Chen, Ph.D., CFA, and James Xiong, Ph.D., CFA, of Ibbotson Associates, a subsidiary of Morningstar, Inc., and Robert P. Kreitler, CFP, and Charles F. Kreitler of Kreitler Associates. To read the full research paper, “National Savings Rate Guidelines for Individuals,” go to: http://MorningstarAdvisor.com/uploaded/pdf/ Savings.pdf 16 Morningstar Advisor Summer 2007

http://MorningstarAdvisor.com/uploaded/pdf/Savings.pdf

Morningstar Advisor - Summer 2007

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