Investment advice on company DC plan

[christfollower1993]

Hi everyone,

I had to switch to my company DC plan this FY, and got a document where I can decide, in percentage, to which funds I want to allocate my monthly contribution to. They gave me very little time (until the end of the week )to fill out the paperwork and choose the funds I want to invest in.

After several hours of browsing threads, wiki and other ressources, this is what I more or less got :

-First and foremost be mindful of the fees. Go with the cheaper fees in the product category you are interested in. (still very unsure what that would be)

-Favor broadly diversified funds

-Bonds are safer but slower to yield benefits.

-Product choice is down to my appetite for risk ( reasonably low ) x investment period (will either cash out before 5 years or leave it until retirement ) x need for said money or not (no I can afford to let it sit ) .

Ive started a spreadsheet with the products / fee but I still have very little understanding on how to evaluate their value. Im sharing a list of the products offered below, if anyone has some insight or experience with it, it would be really appreciated.

Index Collection (Balance Equity 30) Trust fee: 0.154% p.a. of total NAV

DC Global Economy Index Fund Trust fee: 0.55% p.a. of total NAV

Diversified Core Investment Strategy Fund S Trust fee: 0.935% p.a. of total NAV

BlackRock LifePath Fund 2025 Trust fee: Within 0.3575% p.a. of total NAV

BlackRock LifePath Fund 2030 to 2065 Trust fee: Within 0.3575% p.a. of total NAV

Index Collection (Global Bond) Trust fee: 0.154% p.a. of total NAV

Index Collection (Japan Equity) Trust fee: 0.154% p.a. of total NAV

Index Collection (Global Equity) Trust fee: 0.154% p.a. of total NAV

Mitsubishi UFJ DC Emerging Bond Index Fund Trust fee: 0.374% p.a. of total NAV

Mitsubishi UFJ DC Emerging Equity Index Fund Trust fee: 0.374% p.a. of total NAV

Nomura World REIT Index Fund DC Trust fee: 0.363% p.a. of total NAV

Yen Cash Plus Developed Countries High Yielding Trust fee: 0.1958% p.a. of total NAV

One Japan Growth α Trust fee: 0.87175% p.a. of total NAV

Russell Investments Domestic Equity Multi Manager F Trust fee: 0.935% p.a. of total NAV

Baillie Gifford Long Term Global Growth Fund Trust fee: 1.0395% p.a. of total NAV

GS Big Data Strategy (Global Equity) DC Trust fee: 0.7975% p.a. of total NAV

BlackRock ESG World Equity Fund (Unhedged) Trust fee: 0.3608% p.a. of total NAV

For now Im thinking of going :

• 20% Japanese equity
• 40% foreign equity
• 40% foreign bonds

That repartition is based on logic and trying to build a balance rather than a solid knowledge of each type of investment. Other than that honestly Im still quite blind and haven't figured out how to calculate potential profit etc.

Thanks !

 

[createinmeanewheart]

@christfollower1993 What is your timeframe, meaning how close to retirement are you? If you have potentially 20 years to go before retirement I'd probably recommend decreasing your bond allocation.
I don't know the details of those funds but a couple of then look like target retirement type funds - if you got one of those that should likely rebalance automatically over time reducing your need for multiple funds (and thus lower overall fees).

 

[manishk012]

@createinmeanewheart Better look at the detailed documentation for these target retirement funds as they tend to be ultra conservative/risk averse with very high allocation to bonds very early.

 

[christfollower1993]

@createinmeanewheart Thanks ! Im 37 so I still have +20 years. Im trying to find more details on the fund but the docs provided are not helpful. It tracks the performance over time but don't tell you what's inside the fund precisely.

Do you mean the Blackrock life path fund, right ? the descriptions is quite vague " This investment trust targets long-term growth of its assets whilst reducing risk. It invests in a diversified portfolio of domestic equities, domestic bonds, foreign equities, foreign bonds and REITs through the mother funds. As the fund moves closer to the target year (2045), it focuses on the stability of assets by reducing its allocation to equities and REITs and increasing its allocation to bonds. From the target year onwards, the fund basically should maintain a constant asset allocation.", no indications on what proportion for which asset. Is there anyway to find out ?

 

[createinmeanewheart]

@christfollower1993 I generally just Google the name of the fund and it should take you to the fund's homepage. From there you should be able to see what it consists of/what its holdings are.

Personally I would not stress too much about it. I know you want "the best" but try to simplify and just get started. Assuming you do not need to withdraw anything you invest for the next 20 years, just go for either 2, max 3 funds that match the allocation you desire, or just a single "target retirement" fund that will rebalance.

I personally have something similar offered by my company and have 2 funds, all stock at this time (90% international , 10% domestic) since I also have a long term horizon and I do not plan on touching these funds until retirement. I do plan to rebalance and move about 20% into bonds in the near future but for now I've been pleased with the results over the past 6 or so years since I started.

 

[christfollower1993]

@createinmeanewheart Thanks ! Yes thats true, Im not planning to move that money in the next few years, unless I need to leave Japan and cash out under 5 years. Why are you planning to move to bonds in the future if I may ask ?

 

[createinmeanewheart]

@christfollower1993 I'm not going to move to bonds immediately, but as I get closer to retirement I want to avoid being all in stocks like I currently am. Just to reduce risk and volatility. I'm no finance expert, I just want to keep things simple and low cost. I'm fine with increased risk of all stocks given the long timeframe, but I'll want to be in something more stable as I get closer to retirement.

 

[denningsjeff]

@christfollower1993 Those “Index Collection” funds look like good choices due to the low fees and simplicity. If you didn’t know, you can look these funds up on Japan Yahoo Finance and check charts of their past performance. It looks like the domestic equity one tracks TOPIX and the global equity one tracks MSCI. Very standard.

You will often hear English investment advice saying to keep a % of your portfolio in bonds according to your risk appetite, but that doesn’t work so well for Japan residents. Japanese bonds have very low returns due to low interest rates and unhedged foreign bonds carry currency exchange risk. Bonds are priced in their home markets’ currencies, so if the yen appreciates against most of the underlying currencies of the bonds contained in your international bond fund, the value of your investment will inversely decrease in yen terms. However, if the yen continues to decline, the yen value of your bond investment will increase in yen terms. There is therefore an element of FX speculation involved with investing in international bonds (which I don’t personally like).

You’ve said you have low appetite to risk. However, your DC pension presumably isn’t the only place you are saving and investing. It’s just one account in your broader portfolio. Especially if you’re relatively young, you could consider it the risky part of your portfolio and go 100% equities (although historically diversified equity index funds aren’t risky over a long enough horizon) while you save cash and invest in other assets elsewhere.

Not investment advice. I mostly wanted to bring the bond issue to your attention.

 

[christfollower1993]

@denningsjeff Thanks a lot for taking the time. This is by far the most comprehensive explaination I read on bonds. I was actually wondering how the currency would affect bonds value, it makes sense now. So unhedged bonds are tied to JPyen which currently worth no more than toilet paper outside of Japan and Japanese bonds are not worth investing, is that correct ?

No I didnt know about Japan Yahoo Finance. I'll check that out. I currently do not have any other investment, DC is pretty much the first step Im taking in that direction, hence the low risk appetite at the moment, I just dont understand enough to go bold ( note that while Im documenting myself, the risk of doing something stupid is in itself high ;

At the moment Im trying to see what is actually inside these funds, no luck on the smbc site so far. Ive tried site like https://jp.investing.com/funds/smtam-index-collection-balance-eq30 but it only tells you how the fund is doing over time. How can you asset the risk without knowing what's inside ?

On a side note, I looked at the "safe" products included in my DC, aka insurance and time deposit and was surprised to realize that the interest rate is around 0.02~0.05%, how can that yield any profit when it doesnt even match the inflation rate ?

 

[denningsjeff]

@christfollower1993

So unhedged bonds are tied to JPyen which currently worth no more than toilet paper outside of Japan and Japanese bonds are not worth investing, is that correct ?

Unhedged bonds are tied to the currency in which they were issued. I’ll give a simple example. US treasury bonds are priced in dollars. So if you buy a $1 treasury bond today for ¥150, then the yen rises to ¥100 to the dollar, the value of the bond in dollars will still be $1 (plus any returns) but it’ll be as low as ¥100 in yen terms. You’ll have lost 33% due to the exchange rate changing. Something which, the yen being what it currently is, is a particular concern.

By the way, this is also true of foreign stocks. Apple stocks are priced in dollars and so on. If there is a significant shift in exchange rates, it will affect the yen value of international equity funds. However, currency risk is considered less of an issue with stocks. They don’t have this 1:1 relationship with currency bonds have and are more free floating. They are also more volatile, which blurs the effect of currency exchange over the long term. It’s assumed that gains will be large enough to compensate for unfortunate currency moves.

I don’t think Japanese bonds are worth investing in, no. This is speculation on my part but I just don’t see interest rates rising significantly enough. I’d rather keep a larger percentage of my portfolio in cash.

I currently do not have any other investment, DC is pretty much the first step Im taking in that direction, hence the low risk appetite at the moment, I just dont understand enough to go bold ( note that while Im documenting myself, the risk of doing something stupid is in itself high ;

Fair enough. It’s a good idea to start slowly to figure out your risk appetite. If you dump all your money in the stock market and it suddenly drops that’ll just lead you to panic and make bad decisions.

At the moment Im trying to see what is actually inside these funds, no luck on the smbc site so far. Ive tried site like https://jp.investing.com/funds/smtam-index-collection-balance-eq30 but it only tells you how the fund is doing over time. How can you asset the risk without knowing what's inside ?

Funds typically have a document that breaks down the percentage by market, sector, and top 10 companies. If you look up TOPIX and MSCI you should be able to find what is in them.

On a side note, I looked at the "safe" products included in my DC, aka insurance and time deposit and was surprised to realize that the interest rate is around 0.02~0.05%, how can that yield any profit when it doesnt even match the inflation rate ?

It won’t! You’d be lucky to get that with domestic bonds too actually. Guaranteed returns are always lower.

 

[christfollower1993]

@denningsjeff Again, thanks for the clarification, really appreciate !

So basically foreign bonds are out because of the yen fluctuation and domestic bonds could make sense ( should I cash out in yen too) but offer an interest rate too low to be intersting.

That leaves equity ( JP/Foreign) and time deposit or insurance. Time deposit/insurance interest rate is again, too low... which leaves equity.

It seems that Jp equity is not a good bet because the overall performance is low and the current trend up is due to the yen being weak (if I understand correctly).

It feels like choosing the least bad option instead of trying to pick the best...

 

[denningsjeff]

@christfollower1993 I wouldn’t say foreign bonds are out. A lot of people do invest in foreign bonds for the purpose of diversification. But I don’t think they’ll do quite what you initially thought they would do at 40%, which is provide predictability to your portfolio.

I can confidently say don’t bother with the insurances and time deposits in your DC. It seems like a waste of space. Might as well just keep cash in the bank outside of your DC.

I want to reiterate a point I made earlier that, looking at historical trends, diversified equity index funds are only risky over the short term. If you have a horizon of 20+ years it would be extremely unlikely that they would lose you money. The future may be different, of course, but the stock market has always gone up in the long run.

It’s unfortunate that your DC doesn’t include a domestic REIT (real estate investment trust) fund. REITs can act a bit like bonds in a portfolio. The world one might be worth looking at, but you’d need to look it up.

 

[christfollower1993]

@denningsjeff I've ended up going mainly with the Index collection global and am looking for a few online course. I figure I can always rebalance my DC later when I have a better understanding of how to evaluate the products.