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T. Rowe Price
TROW
has been one of Morningstar’s
favorite fund shops for decades. The firm has
generally kept expenses reasonable; fielded a utili-
tarian lineup light on trendy, ripped-from-the-
headlines funds; and held on to managers for much
of their careers.
Because the firm’s lineup is dominated by actively
managed funds, putting together T. Rowe Price
portfolios doesn’t have the same plug-and-play
simplicity that all-index portfolios do. For example,
one of Morningstar’s longtime favorites,
T. Rowe
Price Equity Income
PRFDX
, is undergoing a
manager change, with long-term skipper Brian Rogers
set to step down in the fall. Moreover, some of
the firm’s best funds are closed to new investors,
including
T. Rowe Price Mid-Cap Growth
RPMGX
,
T. Rowe Price Mid-Cap Value
TRMCX
, and
T. Rowe Price Capital Appreciation
PRWCX
. The
firm’s willingness to close funds is a positive for
existing shareholders and has helped the firm main-
tain a steady A average Stewardship Grade since
we began providing them. But it means that not all of
the firm’s best funds are available to new investors.
Bucket Basics
There’s no magic to a bucket strategy. At its heart is
a total-return stock/bond portfolio, managed with an
eye toward delivering both capital appreciation and
income with a reasonable amount of risk. Alongside
that longer-term portfolio, a retiree also holds a
cash “bucket” consisting of one to two years’ worth of
living expenses. The idea behind the cash piece, as
envisioned by financial-planning guru Harold Evensky,
is that it provides a psychological buffer in turbulent
times. Knowing that her living expenses are cordoned
off, a retiree will be more inclined to stick with more-
volatile portfolio constituents with better growth
and income prospects. The retiree can then periodi-
cally refill bucket
1
; income distributions can help
refill bucket
1
, at least partially, and the retiree can
then turn to rebalancing proceeds to supply the rest.
Aggressive Bucket Portfolio
Anticipated Time Horizon:
25
or more years
Because the money in bucket
1
will be used for near-
term spending needs, safety is the name of the game;
we’re sticking with cash. Note that the percentage
allocation in bucket
1
is an approximation; retirees
should be sure to customize this amount based on
their own anticipated spending needs. For example, a
retiree who expects to spend
$30
,
000
of her
$1
million portfolio annually would hold
$60
,
000
(
6%
) of
her portfolio in bucket
1
(
$30
,
000
times
2
).
Bucket
2
steps out a bit on the risk spectrum. T. Rowe
Price Short-Term Bond is in place to serve as next-line
reserves in case bucket
1
is depleted and income
and/or rebalancing proceeds from buckets
2
and
3
are
insufficient to refill it. The fund’s Morningstar Analyst
Rating was downgraded to Neutral from Silver earlier
this year, an outgrowth of concerns over management
changes, as well as the fact that unhedged currency
exposures and a focus on corporate bonds could bring
the fund extra risk relative to its peers. Nonetheless,
the range of returns in the short-term bond category
is generally modest; even though the fund isn’t a
cinch to outperform, it’s unlikely to underperform by a
wide margin. Silver-rated T. Rowe Price New Income
serves as a fine core fixed-income holding; senior
analyst Cara Esser notes that it “packs a bit more
punch” than the Barclays U.S. Aggregate Bond Index
but also keeps an eye on the downside, keeping
duration within
20%
of the index’s and limiting expo-
sure to lower-quality bonds. T. Rowe Price Inflation-
Protected Bond is a fairly plain-vanilla Treasury Infla-
Bucket 1:
Years 1–2
8%
Cash (money market funds and accounts, CDs, checking
and savings accounts, and so forth; percentages will vary
based on the amount of assets and retiree’s spending rate)
Bucket 2:
Years 3–10
10%
T. Rowe Price Short-Term Bond PRWBX
7%
T. Rowe Price Inflation-Protected Bond PRIPX
15%
T. Rowe Price New Income PRCIX
A T. Rowe Price Bucket Portfolio
Portfolio Matters
|
Christine Benz