7Twelve Releases Balanced Fund Benchmark

As a result of the Pension Protection Act the usage of balanced funds as a default investment vehicle will increase among retirement plan sponsors and among the general investing public. Balanced funds meet the requirements of a qualified default investment alternative (QDIA) under the provisions of the 2006 Pension Protection Act (PPA), as do so-called target-date offerings. In addition to their built-in glide path (i.e., dynamic asset allocation model) a common attribute of target-date funds is broad diversification across many asset classes. In fact, at the end of 2008 there was approximately $170 billion invested in balanced funds, according to a new report by Craig Israelsen. The report, “A Better Balanced Benchmark,” was released alongside the new benchmarking methodology and investable product.

The report notes that the largest 10 balanced funds held nearly 80% of all the assets, and that the average 10-year performance of the 10 largest balanced funds from 1999 to 2008 was 3.74%, whereas the 7Twelve Balanced Portfolio generated a 10-year return of 6.97%.

“News Flash”

“News flash…it’s not 1959 anymore,” the report notes. “Today, there are multiple mainstream asset classes that should be considered when building a diversified balanced benchmark.” As for the product name, it refers to “7” core asset classes with “Twelve” underlying subassets. “The 7Twelve Portfolio is constructed to generally follow the time-tested 60/40 guideline, but uses eight sub-assets (instead of one) to create an overall equity exposure of about 65% and four fixed income sub-assets (instead of one) to create a “bond” exposure of about 35%,” notes the report.

All 12 sub-assets are index-based exchange-traded funds (ETFs) and are all equally weighted (each representing 8.3% of the 7Twelve portfolio). The equal-weighting is maintained by annual rebalancing. The differences between the old school balanced benchmark and the new age balanced benchmark are depicted in “Old vs. New.”

The report illustrates 12 asset classes (in seven core asset groups) that Israelsen says should be included in a 21st century balanced fund. The seven core asset groups are: U.S. equity, non-U.S. equity, real estate, resources, U.S. bonds, non-U.S. bonds, and cash. The 12 specific sub-assets are: large U.S. equity, mid U.S. equity, small U.S. equity, non-U.S. developed equity, non-U.S. emerging equity, global real estate, natural resources, commodities, aggregate U.S. bonds, inflation-protected U.S. bonds, international bonds, and U.S. money market.

Balanced funds don’t have a glide path because their allocation stays at or near the 60/40 level over time, notes Israelsen, an associate professor at Brigham Young University, and a principal at Target Date Analytics LLC, a firm that has developed indexes for the benchmarking and evaluation of target-date/lifecycle funds. However, the report notes that U.S. stocks and U.S. bonds have been the “mainstay ingredients” in balanced funds, with the typical ratio being a 60% allocation to large U.S. stocks and a 40% allocation to bonds.

More information is available at www.7twelveportfolio.com.