Last Updated Nov 30, 2009 5:16 PM EST
AARP is best known as a lobbying group for retirees, and a source of discounts at the checkout counter. But it's also a major player in financial services: hawking mutual funds, annuities and all sorts of insurance policies. So MoneyWatch.com asked a simple question: Is the organization looking out for you, or just beefing up its bottom line?
In this, the first of our series on AARP-branded products, we take a close look at the organization's mutual funds. Our conclusion? The funds serve investors rather well, but you have to take a close look to make sure you're getting the investment that's right for you.
Read on for details.
The AARP Funds Switcheroo
AARP has sold mutual funds for 25 years, but the group switched course dramatically in 2006. During the previous 21 years, when AARP co-branded 33 funds actively managed by Scudder, the offerings were known for high annual expenses and mediocre performance.
In 2006, AARP dumped Scudder and began selling low-cost, no-load, index-based funds run by State Street Global Advisors. Today, there are just five AARP funds, available to investors of any age and open to AARP members and nonmembers alike. Three of them replicate mixes of stock and bond indexes, varying their category weightings (AARP Aggressive Fund, AARP Moderate Fund, and AARP Conservative Fund). AARP Income Fund is a taxable-bond index fund, and AARP Money Market Fund is exactly what it sounds like.
AARP Fund Advantages
In general, AARP mutual funds — sold online or by phone (866-218-6142) — have four pluses:
They’re index funds. Because index funds, by definition, match the market (or a slice of it) rather than beat it, they’ve become the darlings of investing academics and Moneywatch.com analysts such as Larry Swedroe (Wise Investing) and “Nathan Hale” (Mutual Fund Insider). Over the long run, researchers have found, few actively managed funds consistently outperform the market. So rather than take a chance that you’ll pick a winner and not a dog, they say, buy an index fund.
Low expenses. Like other index funds, the expense ratio (cost of owning a fund) for AARP funds is quite low — 0.50 percent; 0.30 percent for the money fund. Those are below the average 0.61 percent for comparable stock and bond index funds, but higher than index funds from Fidelity, Schwab, and Vanguard, among others. AARP is contractually obligated to keep its fund expenses low through November 1. After that? A fund spokesperson says only that AARP is “committed to keeping investment costs low.”
Low minimum investments. You can open an AARP fund for as little as $100, with subsequent investments of $25 or more. Index-fund king Vanguard requires $3,000 initially for a taxable account; $1,000 for an IRA.
Free access to financial planners. AARP investors can make toll-free calls for free advice from the fund group’s cadre of noncommissioned financial planners (866-218-6142). A planner, paid by AARP, can determine your risk tolerance and help you develop a financial game plan that may or may not include AARP funds.
“They’re appropriate for the investor who wants to keep things simple and convenient,” says William Jordan, president of the Sentinel Group, a financial-planning firm in Laguna Hills, Calif.
How AARP Funds Have Performed
By design, AARP’s three funds that hold stocks are supposed to be like Goldilocks’ porridge: not too hot in up markets and not too cold in down markets. But are they just right?
For the three-year period ending May 31, 2009, the answer is yes. Morningstar gives five (out of five) stars to each of these funds, which outperformed at least 94 percent of their peers. The AARP Conservative Fund, perhaps not surprisingly, was the best of the bunch.
So far this year, however, AARP stock funds have underperformed the market. “The last few months have been good for the stock market and actively managed funds, while index funds have not done as well as last year,” says a Morningstar spokesperson.
The AARP Income Fund launched in September 2006, so it’s too new to have a three-year track record or a Morningstar rating. It slightly underperformed the benchmark Lehman Brothers U.S. Treasury Bond Index over the year ending March 31.
Bottom line: AARP has done pretty well for its members by selling a range of low-cost, simple index funds. If you’re looking for an easy, inexpensive way to invest, AARP funds are worth a look. (If you will be considering buying an AARP fund after November 1, be sure to check whether its expenses have remained low.) However, by doing some homework, you could put together your own index-fund portfolio and pay lower expenses with fund companies such as Vanguard or Fidelity. And if you prefer investing with a fund manager you think can outperform the market, AARP funds aren’t for you.
Fund by Fund Specifics
AARP Aggressive Fund (80 percent in domestic and international stocks and 20 percent in U.S. bonds; ticker symbol AAGSX) was in the top 4 percent of funds in Morningstar’s Large Blend category over the past three years.
AARP Moderate Fund (55 percent in domestic and international stocks, 45 percent in U.S. bonds; AAMDX) was among the top 6 percent of funds in Morningstar’s Moderate Allocation category. Average annual return over three years: -4.22 percent.
AARP Conservative Fund (70 percent in U.S. bonds and 30 percent in domestic and international stocks; AACNX) placed among the top 2 percent of funds in Morningstar’s Conservative Allocation category. Average annual return over three years: 0.60 percent.
AARP Income Fund (75 to 100 percent in U.S. and corporate taxable, intermediate-term, investment-grade bonds; 0 to 25 percent in money-market securities, inflation-indexed U.S. bonds, junk bonds, foreign-government and corporate bonds, real estate investment trusts, and dividend-yielding stocks; AANCX) is designed to match returns of the Lehman Brothers Aggregate Bond Index.
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