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As Money Management Executive launches this year's set of State Tuition Index and Datasheet reports, a new paradigm for evaluating college savings plan is introduced. With MME's TuitionMAR (minimally acceptable return) statistics, a set of core absolute return benchmarks is now available to assist mutual fund companies, 529 plan sponsors and financial planners in evaluating the ongoing success of a college savings plan investment.
Updated annually and a core element of MME's 529 Risk-Adjusted Performance (RAP) Report series, these benchmarks create a framework for the ongoing evaluation of minimum target rate returns required by parents faced with saving enough for college.
Some call the MAR an investor's hurdle rate, but due to their specificity of purpose and applicability to the college savings plan model, we refer to an absolute benchmark created specifically for the college savings industry as the TuitionMAR.
The application of MARs is common in many investment sectors, including pension funds where a targeted ongoing payout remains a goal in the burgeoning world of hedge funds where the measurement of downside risk below a fixed, given return is often the most important evaluation metric.
For retail investors, though, performance evaluation against strict, sector-neutral benchmarks remains fairly uncommon. Yet due to the non-correlated nature of college savings investment returns (what is achieved by the investor) and tuition inflation rates (what is required by the investor), successful out-performance against relative return benchmarks such as the S&P 500 index provides little information concerning the overall effectiveness of a college savings strategy.
After all, exactly how successful can one consider a college savings strategy where even though the portfolio outpaced its benchmark by 3.5%, it still managed to underperform the tuition inflation rate by 4%.
With the release of MME's State Tuition Index and Datasheet reports, the college savings industry is provided detailed, in-depth analysis of each state's unique tuition trend patterns, cost breakdowns and individually calculated TuitionMAR statistics. Along with a normalized TuitionMAR value, the reports highlight predictive values based on tuition/tuition, room and board rates growing faster than normal, and also slower than history has indicated within each state.
Source: HighBeam Research, A Case for the TuitionMAR.