Money Management Executive
Eight years ago cocktail parties were less social occasions and more trial by fire for Jim Tracy, national sales manager for Hartford Mutual Funds.
"I literally had people tell me that I was obsolete," he said.
But when the go-go markets came to a screeching halt in 2000, and more investors watched their portfolios get decimated each day, suddenly Mr. Tracy's slow-and-steady investment approach seemed relevant again.
Today industry executives are using the stock market's recent bumpy stretch to remind financial advisers, and their clients, that asset allocation funds are not only relevant, but also critical to their portfolios, especially in a slow or downside market, since the funds are designed to protect investors against dramatic market swings.
"The data suggests that the global economy is slowing down," said Quincy Krosby, chief investment strategist for Hartford Financial Services Group Inc., said during a company presentation in New York this month. "Asset allocation offers diversification, and clients need to be the beneficiaries of that."
The Simsbury, Conn., company hopes its message, and lessons from the past, persuade investors not only to invest now, but also to strap in for a smoother, safer ride.
"Asset allocation will be the single biggest determinant in what you earn in your portfolio this year," said Hugh Whelan, Hartford's executive vice president in charge of asset allocation funds.
Investors seem to be getting the message. Last year mixed-equity asset allocation funds, which include target-date and target-risk-type funds, drew $77.8 billion of assets, second only to world equity funds, which attracted $157 billion, according to data from Lipper & Co. of New York. U.S. diversified equity funds were third, attracting $57 billion.
"It goes to show that perhaps people learned a lesson in 1999-2000: that overallocation in one area is bad," said Tom Roseen, senior analyst at Lipper.
What's more, people are willing to pay a premium for the protection such funds of funds offer, especially as they approach retirement, Mr. Roseen said. "People are really looking for that one-stop shop. They will migrate away from the good old no-load funds and go to advised funds."
The question is whether investors will be as willing to stay the course with allocation funds when the markets show signs of rapid growth. Just as these funds do not suffer dramatic drops, they do not generate the blockbuster gains that focused funds, like emerging markets or technology funds, have enjoyed in the past.
"Asset allocation funds really are evergreen funds," said Duncan W. Richardson, the chief equity investment officer for Eaton Vance Corp. of Boston. "They're kind of a good way to combine various parts of the market, get exposure, and not have the heartburn."
For example, Hartford's Balanced Fund uses 14 underlying funds, collectively drawing from 800 fixed-income securities, and 1,100 equities from 40 different countries. Fund composition is examined monthly and rebalanced accordingly.
Likewise, the Eaton Vance Balanced Fund draws from 16 different classes, and its Tax-Managed Equity Asset Allocation Fund draws from a wide array of the company's other products. Both rebalance regularly.
"You don't need to mess around. You don't need to aggressively chase performance," Mr. Richardson said. In up markets, such funds can still serve as strong core investments, he said.
Regardless of what allocation fund an investor may choose, Mr. Roseen stressed the importance of examining the holdings of each to ensure there is no excessive crossover. He also said it is important for investors to understand that most of the funds are made up of proprietary products, not necessarily best-of-class ones, and to determine whether the fees fairly reflect that.
In the end, long-term performance and consistency trumps everything else in any investment, Mr. Roseen said.
In 401(k)s and other retirement plans, once investors are in asset allocation funds, chances are that sheer inertia will keep them there, but in nonqualified plans, keeping investors from chasing performance can be tricky, he said.
Jim Atkinson, principal of Orbis Marketing, a Woodland Hills, Calif., company that specializes in mutual funds, said consistency is critical for companies promoting allocation products in this economic climate.
"If you want people to stay the course, you have to stay the course," he said.
Companies that promote asset allocated funds now but move quickly to the next hot class later will face outflows, Mr. Atkinson said.
"There are clearly going to be investors who are frustrated that they are not getting-forget market returns-above market returns," and managers must prepare their investors for undersized gains but show the compounded value of staying the course, he said.
"Good communication helps, good performance helps, and you have to get [investors'] expectations to match," Mr. Atkinson said.
