Almost all 401(k) plans have the basic asset classes covered, but the degree to which they vary with regard to basic asset class investment options as well as their inclusion of additional classes, can be notable. Target Date Funds (TDFs) are investment vehicles that, too, use asset classes. Finding out which ones can require a little digging, though, as you'll most likely need to reference a TDF's factsheet or issuer's website.
By Will McGough on February 20, 2020
Almost all 401(k) plans have the basic asset classes covered, but the degree to which they vary with regard to basic asset class investment options as well as their inclusion of additional classes, can be notable. Target Date Funds (TDFs) are investment vehicles that, too, use asset classes. Finding out which ones can require a little digging, though, as you’ll most likely need to reference a TDF’s factsheet or issuer’s website.
Let’s take a quick primer on these tools available to retirement savers.
Asset classes are traditionally observed as a hierarchy with certain classes inclusive of others, somewhat akin to a family tree.
It all begins with these foundational designations:
- Equity – investment in the securities of public companies (i.e. stocks)
- Fixed Income – those same companies, plus governments, issue debt to fund various things, and pay interest to investors in exchange for their investment (i.e. bonds)
- Alternatives – catch-all term for investments already packaged as an allocation. Examples: investments that follow trends or use various derivative strategies to go long or short.
Now, let’s look at each.
For Equity, investments are classified as…
- World – a collection of stocks from companies all around the world
- U.S. – just those stocks of companies listed on United States stock exchanges
- International –Stocks listed on foreign exchanges
- Other – These are stocks that are classified according to business type (“sector”) or Real Estate Investment Trusts (REITs)
U.S. Equity is easy, most folks know the traditional style box. It’s a mix of Large, Mid, and Small Cap plus Growth, Value, or Blend.
- Large Cap – stocks which represent the largest companies, such as Apple, Google, Coke, Home Depot, or Delta. This designation typically refers to companies with a market capitalization greater than $10 billion Market capitalization is determined by multiplying a stock’s share price by number of its outstanding shares.
- Mid Cap – stocks that are not the largest, but also not the smallest. These firms most commonly have a market capitalization of $5-$10 billion.
- Small Cap – smaller companies whose value is below $5 billion, they are typically the riskiest of the three groups because their smaller size can leave them vulnerable to additional risks and pressures.
- Growth – stocks which exhibit growth, producing shareholder value through market capitalization appreciation
- Value – Stocks which may appear underpriced when the total value of a company is taken into consideration. This can occur when mature company has a stable business, delivers returns in the form of dividends and shareholder yield, but is situated in a non-growth position. Blend – usually a 45-55% mix of growth and value per category gets you a blend
- The cross section of all of these are the categories: Large Cap Growth (LCG), Large Cap Blend (LCB), Large Cap Value (LCV), Mid Cap Growth (MCG), Mid Cap Blend (MCB), Mid Cap Value (MCV), Small Cap Growth (SCG), Small Cap Blend (SCB), Small Cap Value (SCV)
“International” is the catch-all category for any investments outside of the U.S. These groupings tend to have more stocks per classification given the fact that they are not single-nation based like the U.S. groups.
International indexes are classified as either “Developed” (i.e. composed of companies from nations with mature economies) or “Emerging” (i.e. composed of companies from nations where the economy is not yet mature). Developed market indexes get sliced up the way U.S. indexes do: according to market capitalization but with Small and Mid-Cap bucketed together. Emerging market indexes, because they track such a small percentage of world stocks, are classified singularly.
Developed Markets Large Cap Value (DMLV), Developed Markets Large Cap Blend (DMLB), Developed Markets Large Cap Growth (DMLG), Developed Markets Small/Mid Cap Value (DMSV), Developed Markets Small/Mid Cap Blend (DMSB), Developed Markets Small/Mid Cap Growth (DMSG), Emerging Markets (EML)
In the exhibit below, we have World and Other grouped together
- World Large Cap (WORLDL) – just like US and INT’L large cap, this represents them blended together
- World Small Cap (WORLDS) – again, same logic applies, world stocks at the smallest capitalization category
- Sectors & Industries (SEC) – based on Global Industry Classification Standards (GICS), stocks can be attributed to their business category such as Energy, Technology, Financials, etc
- Real Estate (RE) – primarily Real Estate Investment Trusts, i.e companies you can invest in that own, operate, or finance real estate
Fixed Income is, by its nature, a complex asset class. We’ve simplified its classifications into six categories which can expand to become more complex with various sub-sectors or duration segments.
- Broad Fixed Income (BROAD) – represents bonds that on collective, are generally managed to very well-known benchmarks like the Barclays Bond Aggregate Index
- Core Fixed Income (CORE) – this is where we catch the basic buckets (i.e. investible areas) of BROAD such as Government/Treasuries, Corporates, Mortgage Backed Securities, Municipal Bonds, and International Developed Market Fixed Income
- Spread-Related Bonds (SPREAD) The underlying concept here is that investors in higher-risk bonds earn more interest than they would owning safer, U.S.-backed Treasury bonds. This difference is the spread. Spread classifications are High Yield Bonds, Bank Loans, Preferred Securities, Convertible Securities, Emerging Market Debt, and other Nontraditional Fixed Income.Ultra Short-Term Investments (USHORT) – is basically money markets, or relatively risk free debt.
- Guaranteed Investment Contracts (GIC) – usually only available via insurance company 401(k)platforms, GICs represent stable value products that pay a guaranteed interest rate backed by the insurance company. Investors do not see any day to day fluctuation in their investments on these, as they are marked based on book value. Typically, Plan Sponsors agree to some type of restrictions or payment by the Plan should they leave the recordkeeper while participants are invested in these products.
- Treasury Inflation Protected Securities (TIPS) – are a special type of fixed income issued by a government with the interest payment tied to the level of inflation.
Last, but not least, we have 4 main categories for alternatives of traditional equity and fixed income.
- Tactical Strategies (TACT) – trading strategies that seek to be active in their allocations whether its risk on, risk off, or more dynamic approaches toward tilting exposures
- Active Asset Allocation (AAA) – active, multi-asset strategies. Liquid Alternatives (LIQALT) – think of these as “hedge funds in a box” – strategies designed to seek equity-like returns and mitigate downside risk via diversification and easily tradable (i.e. liquid) alternative investments.
- Liquid Alternatives (LIQALT) – think of these as “hedge funds in a box” – strategies designed to provide equity-like returns with fixed income-like volatility
- Commodities (COMM) – typically used in asset allocation by some. Mainly accessible through futures contracts on various commodities like gold, oil, agriculture, and livestock
Author: Will McGoughChief Investment Officer of Retirement Will McGough joined Stadion Money Management in 2003 and currently serves as Chief Investment Officer of Stadion’s Retirement investment strategies which comprises oversight of Stadion’s risk-based, target date, and managed account strategies. He is a member of the Investment Committee and Senior Management team, and serves as as Stadion’s Chief Investment Officer, Retirement. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Will received his BBA in Finance from the University of Georgia and also holds the Chartered Financial Analyst designation. Will is a member of the CFA Institute, the CFA Society of Atlanta, the American Association of Professional Technical Analysts, National Association of Active Investment Managers, the UGA Alumni Association and National Eagle Scout Association.
There is no guarantee of the future performance of any Stadion account. Material has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Results based on available universe of Target Date Fund Series, which includes registered mutual funds, and non-registered collective investment funds and insurance accounts. Collective investment funds and insurance accounts are only available for investment to qualified retirement plan assets such as 401(k) plans.The commentary, analysis and opinions expressed are those of Stadion’s investment Team. The commentary, analysis and opinions referenced are as of the date of publication and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice. This is not a recommendation to buy or sell a particular security. The investment strategy or strategies discussed may not be suitable for all investors.
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