Commentary: Second quarter 2016 plan performance rankings

http://www.savingforcollege.com/articles/commentary-second-quarter-2016-plan-performance-rankings-966

Financial Professional Content

Each quarter Savingforcollege.com analyzes the investment performance figures for thousands of 529 portfolios and ranks the 529 savings plans from best to worst for one-, three-, five-, and 10-year investment performance. We rank plans that consumers can enroll in directly, as well as those sold through brokers and fee-based financial planners).

In producing our rankings, we compared the reported investment performance of a subset of portfolios from each 529 savings plan. We use a subset because plans vary greatly in their underlying investment options. We use a representative subset of options to compare plans on an apples-to-apples basis. The "performance score" determines the ranking. For more details, please view our methodology.

Top performing 529 plans

For the most part those plans that have performed well continued to perform well. A few outliers such as Virginia529 inVEST and SMART529 WV Direct did not place in the top 10 in the three- or five-year periods despite top placement over one- and 10-years. In both cases, though, the plans were just outside their respective top 10s.

2Q16 market commentary

Domestically, the U.S. made modest gains, with the S&P 500 up a little less than 2.0% in 2Q16. After a highly volatile first quarter investors might have been looking for international markets to calm. Instead, the Brexit vote – the vote of the United Kingdom to leave the European Union on June 23, 2016 – brought international markets tumbling. The VIX, a measure of market volatility and activity, nearly hit its prior 2016 high. Pundits were anticipating a recession in the U.K., a contraction in Japan, and industrial overcapacity in China. As a result, 529 plans with more aggressive international allocations in their age-based portfolios generally fared worse in the short-term than those with less exposure.

Significant international moves can have a greater impact on 529 savings plan rankings than domestic equity and fixed income movements. This is because allocations to international investments vary widely from plan to plan. Certain states have, in the past, limited the amount of exposure the plan was allowed to have to international investments. So when there is a significant change in foreign markets, plans heavy in domestic holdings benefit. The reverse, however, is also true.

Second Quarter 2016 S&P 500 Returns
Source: Yahoo! Finance

As a result, we again saw huge movements in short-term rankings, just as in 1Q16. Almost unilaterally the movements can be traced to plans with low-costs or limited exposure to international investments. Some of the biggest movers in the one-year period:

• Louisiana jumped thirty places from its 1Q16 relative rank of 37 among its peers into the top-10 over a the one-year period, likely due to its limited and very low-cost international exposure.
• The SSGA Upromise Plan in Nevada jumped 22 ranks in its one-year relative return rankings, and 11 over three years, enough to earn it a top-10 placement over the three-year period.
• While not quite sufficient to break into the top-10, both the Mississippi Affordable College Savings (MACS) Program and Nebraska’s TD Ameritrade 529 College Savings Plan saw their relative rankings increase by double-digits.

Despite the extreme rank changes in certain cases, no plan shifted more than five positions over five- or 10-year time periods with the sole exception of the Nebraska Education Savings Trust, which was flat over one- and three-years, but jumped 10 ranks over the five-year period. This only serves to reinforce the notion that short-term performance is, generally, less relevant than long-term performance. There are good reasons why investment disclosures include the language, “Past performance is not necessarily an indicator of future returns.”

Second Half 2016

There is uncertainty ahead for financial markets, with the November elections expected to cause turmoil in financial markets regardless of who is elected. Markets are also near their all-time highs, which always gets the media in a frenzy. Still, most economists believe the underpinnings of current markets are fundamentally sound, so we could see steady growth with a spike in volatility resulting from the November elections, but it’s difficult to say with any certainty.

Within the 529 plan markets, the new Wealthfront 529 Plan is scheduled to launch at some point in the next few months. It should prove interesting to see how the first roboadvisor plan impacts flows in the industry. Asset growth among roboadvisors has, according to some reports, been more muted in the short-term than anticipated. But it remains to be seen what long-term asset capture will look like as they gain visibility with consumers, particularly as millennials mature, pay off their student loans (if they can), and seek advice for managing their own wealth.

You can find the full performance rankings here.