Morningstar Advisor - Spring 2008 - 7

Letter from the Editor Retirement, Ready or Not Jerry Kerns Reverse the sequence of returns, and investors who retire amidst a bull market greatly increase their chances of not running out of money, even if they later hit a few market potholes. This point-in-time risk is just one of many that investors face during retirement—risks that researchers at Ibbotson Associates and Morningstar are tackling as they study the best ways to create optimal retirementincome portfolios. We focus on some of their work in our Spotlight section on retirement income (page 30). The lead article presents new research on the topic from Ibbotson president Peng Chen and research consultant James X. Xiong. They argue that there is a shortcoming in the traditional way the industry creates efficient retirement portfolios. It focuses too much on risk-adjusted returns, and not on what retirees care most about: income. Chen and Xiong’s solution: a brand-new efficient frontier framework. Not only is it able to examine a portfolio’s ability to generate income, but it also can take into account various investment strategies and nontraditional asset classes, such as VAs with guarantee minimum withdrawal benefits. Next in our Spotlight, retirement benefits expert Natalie Choate gives a practical guide on how to maximize your clients’ IRAs once they begin taking required minimum distributions. Then, equity analyst Josh Peters tells us how he finds high-quality dividend payers for two portfolios he runs for his newsletter Morningstar DividendInvestor. Finally, Morningstar fund analysts Daniel Culloton and Andrew Gunter take an early look at the new managed-payout offerings being rolled out by a half dozen mutual fund companies, and Rod There’s a chart you might have seen that demonstrates how the sequence of market returns can have a profound impact on how long a retirement portfolio can produce income. Retirees who have the unfortunate luck of having to start taking distributions in a bear market—a la 1973-74 or 2000-02—dramatically increase the risk of depleting their portfolios, even if they encounter a bull market later in retirement. Bare, Morningstar’s director of asset-allocation strategies, writes about new target-date indexes he helped create. He calls them “target-plus” indexes because they provide much-needed benchmarks for target-date funds years after their retirement dates. This issue isn’t all about retirement income, of course. Paul Kaplan, Morningstar’s vice president of quantitative research, follows up Kunal Kapoor’s interview last issue with fundamental indexing guru Rob Arnott with his own study of the subject (page 22). Kaplan finds that fundamental indexing has a lot to say about value investing but that it has not produced a new index paradigm. For this issue’s Morningstar Conversation (page 53), Kapoor, president of Morningstar Investment Services, talks with value manager Richard Pzena, who has about a 40% stake in financials. Pzena has conviction, in spades; he also has a track record that suggests he might be right. In Undiscovered Managers, we profile Ralph Shive (page 60), who runs a small group of mutual funds through 1st Source Bank in South Bend, Ind. You’ll learn that there’s nothing small town nor banker about Shive. If you’re looking for some sedate investments for today’s volatile world, head over to Investments a la Carte (page 68) for 14 picks from our analysts that can put you at ease. Finally, last issue we promised to follow up John Rekenthaler’s article on whether adherence to the Morningstar Style Box hinders performance. We’re still crunching the numbers on a study Rekenthaler performed and hope to have an article ready soon. My apologies. Please send your feedback to magazine_editor@morningstar.com. Retiring into a Bear Market Bear Market $500K 400 300 200 100 1973 1977 1981 1985 1989 July 1994 Retiring into a Bull Market Bear Market $2.5M 2.0 1.5 1.0 0.5 July 1994 1989 1985 1981 1977 $500,000 portfolio is composed of 50% stocks and 50% bonds; $25,000 is withdrawn annually. First graph is acMar-73Feb-75 May-77May-79May-81May-83May-85May-87May-89May-91May-93 May-73May-75Apr-77Jan-79 Apr-81Feb-83 Mar-85Jan-87 Apr-89Feb-91Dec-92 Apr-73Mar-75 Jun-77Mar-79 Jun-81Mar-83 Apr-85Feb-87 Jun-89Mar-91Jan-93 Jun-73Apr-75 Aug-77Jun-79 SequenceJul-85Mar-87 Aug-89reversed Aug-73Jun-75 Jul-77Apr-79 Aug-81Jun-83 Jun-85Apr-87 Jul-89Apr-91Feb-93 Jul-73 Aug-75 Oct-77Jul-79 Sep-81Aug-83 Oct-85Aug-87 Oct-89Aug-91Jun-93 Sep-73Jul-75 returns. Oct-81Jul-83 Nov-85Jul-87 Nov-89Jul-91Apr-93 Oct-73Sep-75 Feb-78Dec-79Nov-81Sep-83 Dec-85Oct-87 Dec-89Oct-91Aug-93 Nov-73Oct-75 Mar-78Jan-80Dec-81Oct-83 ofJul-86Mar-88Jan-90Nov-91Jul-93 Dec-73Nov-75 May-78May-80May-82May-84May-86May-88May-90May-92 Jan-74Dec-75 Apr-78Feb-80Jan-82Nov-83 Jan-86Nov-87 Feb-90Dec-91Oct-93 Mar-74Jan-76 Jun-78Mar-80Feb-82Dec-83 Feb-86Dec-87 Mar-90Jan-92Nov-93 Feb-76 Aug-78Jun-80Mar-82Jan-84 Mar-86Jan-88 Apr-90Feb-92Dec-93 Mar-76 Jul-78Apr-80 Apr-82Feb-84 Apr-86Feb-88 is Sep-91Sep-93 Apr-76 Sep-78Aug-80Jun-82Mar-84 Jun-86Apr-88 Jun-90Mar-92Jan-94 Jun-76 Oct-78Jul-80 Aug-82Jun-84 Aug-86Jun-88 Aug-90Jun-92Mar-94 Aug-76 Nov-78Sep-80Jul-82Apr-84 Sep-86Aug-88Jul-90Apr-92Feb-94 Jul-76 Feb-79 Sep-82Aug-84 Oct-86Jul-88 Sep-90Aug-92 Sep-76 Sep-79 Oct-82Jul-84 Nov-86 Oct-79 Nov-82 Nov-79 Dec-82 Sep-87 Nov-90Sep-92 Dec-90Nov-92 tualFeb-73Jan-75 Feb-77Dec-78 Mar-81Jan-83 Feb-85Dec-86 Mar-89Jan-91Oct-92 historical Sep-77Aug-79Jul-81Apr-83 Sep-85Jun-87 Sep-89Jun-91Mar-93 returns Oct-90Jul-92 May-94 Apr-94 Jun-94 in second graph. Feb-74 May-76 May-74 Oct-76 Apr-74 Nov-76 Jun-74 Dec-76 Aug-74 Mar-77 Oct-80 Jul-74 Nov-77 Nov-80 Sep-74 Dec-77 Dec-80 Oct-74 Jan-78 Feb-81 Nov-74 Sep-84 Oct-84 Nov-84 Dec-84 Aug-85 Sep-88 Oct-88 Nov-88 Dec-88 Feb-89 MorningstarAdvisor.com Jan-73Dec-74 Jan-77 Jan-81 Jan-85 Jan-89 Jul-94 7

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Morningstar Advisor - Spring 2008

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