Chevron could learn a lot from Warren Buffett
Reprinted courtesy of MarketWatch.com.
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There’s an old saying: Don’t throw out the baby with the bath water. Trustees of Chevron’s 401(k) retirement plan should have remembered that bit of folk wisdom before they tinkered with the plan’s investment options.
The “bathwater” that was thrown out in this case was the actively managed Artisan Small Cap Value Fund ARTVX, +1.19% which once had a great track record but later ran into hard times, winding up in the cellar of its peer group’s performance.
The “baby” that was thrown out — but which should have been kept — was the entire asset class of small-cap value, arguably the most valuable (pun intended but applicable) equity asset class for long-time investors.
Had Warren Buffett been at that trustees’ meeting, he would almost certainly have persuaded them to keep the baby while dumping out the bath water. Had I been there, I would have done my best to achieve the same result.
Chevron Corporation CVX, +1.79% has approximately 64,700 employees (according to the latest data on Morningstar.com). Presumably the majority of them rely on the company’s 401(k) plan for their long-term financial future. That means they must rely on the judgment of the plan’s trustees, who decide what investment options are available within the plan.
When the trustees met last year to revise those options, they made several sound decisions.
•They added the Vanguard REIT Index Fund, giving employees a low-cost opportunity to invest in commercial real estate.
•They added the SSgA Inflation Protected Bond Index Fund.
•They ditched the Artisan small-cap value fund, which ranked in the bottom 5% among its peers over the past five years.
•They also ditched an actively managed small-cap blend fund and replaced it with the Vanguard Small-Cap Index Fund, a much less expensive way to invest in this blend of small growth and value stocks.
But at the same time, the Chevron trustees let their plan’s participants down by not adding a small-cap value index fund. Vanguard has an excellent one that I recommend, so it would have been easy to do that.
The result is that tens of thousands of Chevron employees don’t have access in their retirement plan to small-cap value stocks. I think that’s too bad, and I think Warren Buffett would agree.
Chevron is far from the only large employer without this asset class in its retirement plan. In a study of the country’s 100 largest retirement plans, I found that only 42% of them included U.S. value stocks at all, let alone small-cap value stocks.
However, Chevron is a particularly unfortunate case for three reasons. First, because the trustees were making changes. Second, because small-cap value was on their radar. And third, because the trustees obviously had access to Vanguard index funds.
I was not in the room with the trustees, but I imagine that somebody voiced the opinion, partly based on ARTVX’s performance, that small-cap value stocks have outlived their usefulness. Somebody else probably noted how many plan participants had been hurt by small-cap value (undoubtedly this comment would not have included mention of the reason for that hurt: the trustees’ poor choice of a small-cap value fund some years earlier).
The consensus in the room may have been something like “Let’s give them a small-cap blend fund. That will have some value in it for those who believe in it.”
One thing this illustrates is that retirement-plan trustees are not immune to what’s popular or “trending” and what’s not.
This whole topic has huge financial consequences to workers in this country, as detailed in a current article in Consumer Reports, which I recommend.
In the late 1990s, many U.S. workers thought their retirement-plan trustees were out of touch if they didn’t offer Janus funds, which were designed to make money by taking large risks. Those funds made lots of money for a few years, but when the market turned sour, they lost a lot of money — and almost all of their cache.
In the case of Chevron, I wish I had been able to speak with the trustees before they made their decision, so I could have educated them a bit about small-cap value investing.
Over the past 15 years, small-cap value stocks had annualized gains of 9.4%; that’s 20% more than the 7.8% gains from small-cap blend stocks. Did Chevron’s trustees ever bother to notice this?
As I previously noted in a column last spring, over the past 87 calendar years, small-cap value stocks had annualized gains of 13.6%, vs. 12.2% for small-cap blend stocks. So much for the argument that the attraction of small-cap value is only a thing of the past.
Earlier I mentioned Warren Buffett, and I haven’t forgotten him.
Buffett has made the majority of his money over the years as a value investor. I bet most Chevron employees would like the chance to emulate him with some of their retirement savings. Retirement-plan trustees should not force participants into making the “right” choices with their money. But those trustees should give participants the necessary tools to make their own choices.
If you regard an asset class as a “tool,” then Chevron employees have unfortunately lost one of their most important ones. Fortunately, as the trustees of the Chevron plan have demonstrated, plan options can be changed. I hope some Chevron employees will take this information to their trustees and persuade them to offer the Vanguard Small Cap Value Index Fund in the plan.
I’d love the opportunity to revisit this topic and give those trustees a public pat on the back for doing the right thing.
As mentioned above, Chevron is only one of many corporations that fail to do all they could for their employees. For more on that, I suggest you read this previous column.
My parting advice is simple: If you are in a retirement plan that doesn’t have all the asset classes you want, get together with some of your peers and petition the plan trustees for a chance to educate them.
You have nothing to lose except some time. And if you are successful, you could have a lot to gain.
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Richard Buck contributed to this article.