Although we’ve experienced a recovery in the equity markets this year, investors remain gun-shy about jumping back into the markets full throttle. This is quite understandable, of course, since many investors are still reeling from three years of losses. To help coax investors back into the equity markets, investment firms are increasingly offering mutual funds that include alternative investments, also called asset allocation funds, which provide a cushion when the markets head south.
Two such firms that recently launched asset allocation funds are Hartford, Connecticut-based Phoenix Investment Partners, the asset management subsidiary of The Phoenix Companies, Inc., and Kauser Management, LLC, in Boulder, Colorado. Phoenix is offering two new funds, The Phoenix Partner Select Wealth Builder and Wealth Guardian, which are both modeled after institutional portfolios and include allocations to seven Phoenix mutual funds offering traditional and alternative strategies. Wealth Builder is a capital appreciation fund that has an 80/20 allocation to equities and bonds, while Wealth Guardian, a current income and capital appreciation fund, has a 60/40 allocation to equities and bonds. Both funds also include a 15% exposure to alternative investments on the equity side–10% in the Phoenix-Duff and Phelps Real Estate Securities Fund and 5% in the Phoenix Market Neutral Fund, which employs a long/short strategy. Both funds, launched in early August, are offered in A and C shares, and require a $500 minimum investment. The A shares charge a 5.75% front-end sales load.
Kauser Management’s Technical Chart Fund is a first-of-its-kind long/short asset allocation fund that bases all of its investment decisions on technical chart analysis. “There’s no fundamental analysis,” says Matthew Rich, the fund’s portfolio manager. Technical chart analysis, an investment style that has primarily been available to wealthy individuals able to invest in hedge funds, “is a strategic investment style that basically analyzes different chart patterns that stocks trade in based on price and particular volume trends,” Rich explains. After analyzing those “chart patterns that happened over the past 10 to 15 years, we try to accurately predict the future stock movement, based either on the upside or the downside.”
So unlike fundamental analysis, which is based on the financial position of a particular company, technical chart analysis assesses a security’s price trends over a period of time. Rich, who previously managed a hedge fund, says the fund’s primary objective, like other asset allocation funds, “is to protect clients’ assets in poor market conditions” by outperforming in down and sideways markets.
The Technical Fund, launched September 2, is a no-load fund with a 2% expense ratio. The fund has a $5,000 minimum investment, or a $1,000 minimum investment if used in retirement accounts. Charles Schwab and Wachovia are the two primary channels of distribution for the fund.
Plusses and Minuses
Unlike the asset allocation funds of yore that used just stocks, bonds, and maybe cash, the new breed of asset allocation funds are “responding to a more sophisticated market, more sophisticated financial advisors, and more sophisticated clients looking for strategies that are more similar to [those used by] institutional clients,” says Steve Gresham, chief sales and marketing officer for The Phoenix Companies. The “more advanced” versions of asset allocation funds, he says, now mix stocks and bonds with international stocks, high-yield bonds, and alternative investments that offer low correlations to traditional asset classes. “The beauty of asset allocation, at least in the modern history of the markets, has been [that it also serves as] a risk reduction strategy,” Gresham says.
The downside to these types of asset allocation funds, though, is that they tend to lag when the markets do well. “Since I’m always going to have some short positions in the [Technical Chart] fund, [which can be short up to 50%], if the market continues to go up at a rapid pace, I’ll probably underperform somewhat,” Rich says. Gresham concurs. “Asset allocation funds are spread across a number of different parts of the market, so in a roaring bull market, they’re going to lag unless they are allocated to the roaring stocks,” he says. “The downside for advisors using asset allocation funds is that in a rip-roaring bull market, certain clients will say I’m in something that’s too boring.”
A Mixed Performance Record