Smart Investing


October 19, 2012


Point your gaze away from target funds

My clients often ask me how to invest their 401(k) at work. We can’t move out of their 401(k) because they are still employees of that company, but I do look at their options as a service to my clients and give my opinion of where they should invest their 401(k) contributions.

One type of fund I’ve never recommended is target funds — funds where the asset mix becomes more conservative as you get closer to retirement.

In 2001 these funds had just $12 billion in them, and as of 2011 they have grown to $376 billion. This was another one of Wall Street’s great ideas to help you invest your money so they could make more in fees.

A recent paper released from Research Affiliates states this is a bad idea based on its research, which simulated performance over the past 141 years. The research concluded that a typical target date fund strategy would have yielded on average less than a constant 50-50 stock bond portfolio.

Also, a more aggressive portfolio, or the inverse of a target portfolio, did better than both strategies. The reason being is as you get closer to retirement, your portfolio is much larger, so 10 percent of $250,000 is $25,000, far better than 5 percent of $250,000, or $12,500.

My feeling has been, and always will be, just because people are older they should not be penalized for that and have to put their long-term money into more conservative investment when stocks are trading at good levels. When stocks become pricey, sell some off.

I know this takes a lot more work for financial advisers than to just sell you a fund or come up with some silly asset allocation program. It takes real research and knowledge about what people are paying for something, but it will pay off for clients in the long run.

For those who are currently in target funds, think about what is happening now: Your fund is selling stocks off in the portfolio when they are trading at 10-13 times earnings and buying bonds at all-time record highs, when the 10-year Treasury is paying 1.7 percent or so.

Remember, when interest rates go up, bonds go down, and that means your portfolio will go down as you near retirement or, worse yet, are in retirement. If you or someone you know is in these target funds, I would highly recommend you rethink your strategy or feel free to contact me.

I received a request from Trev asking if I’ve looked at Phillips 66 (NYSE: PSX) lately. He says he bought some of its stock recently and it appears to be a good value at this time.

Trev, I have not looked at PSX lately, but will now.

PSX is basically an oil company, and I do think that every portfolio should have energy in it. I liked the valuations of the company with a PE of only 6.1 versus the industry at 9.4 price to sales. Book value and cash flow also looked good as well.

I also noticed that the mean of 17 analysts are looking for earnings per share of $5.94 looking out to the year ending December 2013. I would have liked a tighter range than the low estimate of $4.80 and the high of $6.89, but even a 5 percent miss on the $5.94 would still be an EPS of $5.64. At 16 times earnings that would equal a stock price of $90 per share, well above the $45-50 current price.

There are a couple of things I didn’t like, and this is why I watch my companies closely. Quarter-over-quarter sales were down 10.5 percent, yet earnings per share climbed 13.6 percent. How did the company manage to grow EPS on declining sales? It’s important to know that if you own this company. The industry average debt to equity is 11.4, yet PSX is 42.2, which is not bad but worth pointing out.

I also received a request from Walt about Organovo Holdings Inc. (PNK: ONVO), asking if this is pure speculation. The company has no earnings, price to sales of 89.7, EPS fell 110,517 percent, and no analysts follow this company. So, Walt, I must say yes, this is pure speculation in the truest form.

Have a question or a company you'd like me to take a look at? Email me at

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


October 19, 2012