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Portfolio > Mutual Funds

But Are They a Good Deal?

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When could it make sense for an advisor to use an asset allocation fund for a client?

Perhaps when advisors want to achieve lower risk through diversification for investors with smaller portfolios. One fund family that has a group of asset allocation funds, MFS Investment Management, celebrated the three-year anniversary for the funds in June, and two of them, the MFS Aggressive Growth Allocation Fund (MAAGX), and MFS Growth Allocation Fund (MAGWX), have achieved Standard & Poor’s five-star ranking for the three years ending June 30th. The MFS Moderate Allocation Fund (MAMAX) received four stars, and MFS Conservative Allocation Fund (MACFX) got three stars for the three-year period.

The allocations are based on Modern Portfolio Theory, and are modeled to match a specific risk profile. Unlike target maturity or lifecycle funds, which modify allocations on a stage-of-life timeline, the MFS funds stay true to their risk classifications, rebalancing daily, so there may be times when it is appropriate to switch from one fund into another if a client’s situation changes.

“Investors woke up to the benefits of diversification in the down market of 2000-2002, and that’s why we’ve seen so much interest in these types of portfolios,” says Joseph Flaherty, the portfolio manager at MFS who developed and manages these funds to provide investors with “easy access to broadly diversified, professionally managed asset allocation portfolios.” Some advisors use the funds in a “core-satellite approach,” placing the bulk of a client’s portfolio in the asset allocation fund that matches their risk profile. Advisors add value “by layering on other asset classes or funds that they may favor,” according to Flaherty. “It allows them to express things tactically and it allows the bulk of their portfolio to have that rebalancing process.”

“For high-net-worth investors,” advisors are “giving them that type of advice on a regular basis, but they don’t necessarily have the time to spend with each and every investor and for some of their smaller clients–they’ll direct them to a solution like this,” Flaherty says. The funds carry a maximum load of 5.75% but MFS waives the load for registered investment advisors. The portfolios are invested in shares of MFS institutional funds and are rebalanced daily with cash inflows, and quarterly or during extreme market conditions if necessary. “A lot of the work we did in constructing these portfolios was about getting that risk profile right, and a lot of what we do day-to-day is about maintaining that risk profile. It’s really all about trying to meet client expectations.”

Flaherty concludes that advisors like asset allocation funds for their “multiple layers of efficient diversification, and the disciplined rebalancing process.” He says advisors use them as “a sophisticated product for investors that don’t have time or the money to pay for that level of sophistication, so it’s easy for them to direct some of their smaller clients into a product like this.”–Kathleen M. McBride


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