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3 Watch List Ideas for Investment Committees


By Michael McKeown, CFA, CPA - Chief Investment Officer

After wrapping up due diligence on fund performance for 2015 across our 401(k) clients, thinking about the message to convey to plan sponsors is on my mind.  Here are a few areas the executives, board members, finance, and human resources teams should think about when reviewing funds.

1. Your bond funds have credit risk – how much is okay at this stage in the cycle?  This expansion is turning seven years old in June (yay!).  The longest economic expansion in history is ten years, so at some point, there will be a recession.  Corporations took out $8 trillion in debt since 2008 and this area will likely be the epicenter in the next economic downturn (unlike the last cycle where household mortgage debt was the powder keg).  Be wary of funds dipping in credit quality compared to previous years.  This could mean the fund is reaching for yield at the expense of capital preservation – not something one wants in the ‘safe’ part of a portfolio.  You will not find this in the returns data of the shiny due diligence report.  Your analyst must dig deeper and not just be a numbers ‘reporter.’

2. After a straight up market the past 7 years, it is tough to catch up with index returns.  Do not sell your quality manager just to do something.  You cannot get those returns back – and if it is a low turnover strategy, you are simply buying high to sell low if you are rotating within the same asset class.  Focus on process over outcomes.  On average, institutional investment consultants do a terrible job of selling managers at the wrong time and buying managers after outperformance.  Simply try to minimize mistakes.

3. Three asset classes (fund categories) that we do not think are appropriate for 401(k) plans include high yield corporate bonds, commodities, and sector specific funds (except REITs).  While it may sound like I am picking on areas that have gone down over the last year, we advised committees against these areas since we started advising plan sponsors on ‘cleaning up’ bad funds lineups.  Asset classes that can permanently impair capital due to very cyclical return patterns or a low historical return premium are inappropriate.


This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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