Asset Allocation Funds Need Advice

Speaking at a press event held at The New York Stock Exchange Friday, Tracy said that asset allocation funds are a solution for investors looking for an easy way to get broad exposure to the market. The simplicity of asset allocation funds is part of their appeal, said Hugh Whelan, Executive Vice President of Quantitative Strategies for Hartford Investment Management Company. For example, he said, a balanced fund can be invested in 14 mutual funds which may mean an investor has holdings in hundreds of individual investments located in 40 countries.

However, Tracy said, given the environment and what is at stake for retirement plan participants in trying to save, it is essential that investors obtain professional advice to reach long term goals.

There was a great deal of damage done to portfolios in 2000 through 2002, Tracy said, something the industry needs to work to prevent. Investors were very aggressive and got caught up in day trading, believing they could achieve incredible returns on an ongoing basis, a damaging mentality for many. Tracy said that one of The Hartford’s best performing funds has had a return of 19%, but it is the most aggressive fund. If employees look at fund menu they might put all their money in that fund just by looking at the return, but they might be 60 years old, and therefore that level of risk in their portfolio could be very damaging. This is why proper advice to people about what funds are best for their portfolio, even which asset allocation fund is best, is necessary.

The asset allocation of a fund “will be the single biggest determinant on what you earn in your portfolio this year,’ according to Whelan. The integrated rebalancing is vital for participants, he said, because without rebalancing, over time, the higher risk investments in the portfolio will become a larger part of the portfolio and you will have a riskier portfolio instead of dialing risk down.

Evaluating these funds is however, difficult because there is no standard by which to compare; “I would love it if a benchmark did emerge,’ Whelan said. The lack of continuity is a shortcoming of the funds and the discrepancy among the funds with the same goal can be seen on days such as February 27, 2007 when there was a big sell-off. On that day, many balanced funds had vastly different experiences, showing that although they have similar equity targets, their underlying allocations and holdings are significantly varied, Whelan said.

Two key steps in managing asset allocation funds are first, to set targets for a predefined level of risk and maximizing the return within that risk and then second, to implement and maintain that target strategy, Whelan said. In evaluating the funds, those two steps needs to be considered; “I think fund managers have to explain the risk they target,’ Whelan commented. It is important to look under the hood of the asset allocation model and look at the underlying funds, he said. Active managers will typically turn to investments outside the benchmark, which is ok, Whelan said, “but I need to know that in order to evaluate the fund.’