News and analysis from Standard & Poor’s MarketScope Advisor
Investment guides and pundits are constantly reminding us that asset allocation is the single most important factor for successful investing. And since advisors and their clients who use mutual funds in their portfolio construction are already paying professional asset managers for their time and expertise, it stands to reason that asset allocation, in addition to stock picking, trade execution, cash management, and other helpful functions, would be one of the services provided. Yet while there are more than 100 U.S. mutual funds that offer asset allocation by investing in a mix of equity and fixed income securities, investors, for the most part, have chosen to perform that task themselves: of the $7.8 trillion invested in non-money market mutual funds, just $641 billion–8%–is held by such “asset allocation” funds, according to Investment Company Institute (ICI) figures.
Slowly, that is changing, after the stock market implosion of 2008 and early 2009 wiped out equity investors’ gains for the past decade or longer. Since September 2009, investors have pumped $18.9 billion into these funds, also known as “blended,” “hybrid,” or “balanced” funds, while domestic equity funds experienced net outflows of $43.9 billion over the same period.
To find the most attractive asset allocation funds, we screened for funds with Standard & Poor’s highest five star rank, and that also have at least $20 million in assets, are open to new investors, and have share classes for individual investors. We also chose to exclude all those that are simply “funds of funds,” since that would entail analyzing the appeal of the funds they owned as well as the fund itself. With the list narrowed to about 30 funds, we choose three funds that combined strong performance over the past 10 years with low costs, and chose one from each of three groups: growth-oriented funds that have 60% or more of their assets invested in equities, moderate funds that have a 40% to 60% equity allocation, and conservative funds with less than 40% of their holdings in equities.
Among growth-oriented funds, American Beacon Balanced (AABPX *****) combines strong long-term performance, moderate expenses, and a relatively large asset base of $842 million. The fund returned an average of 5.54% annually over the past 10 years compared with a peer average of 2%, according to Lipper data, and 7.78% since it opened for business in August 1994. It currently holds just shy of 60% of its asset in equities, an allocation that can vary between 50% and 70%, the fund says. About half of its fixed income holdings are corporate bonds. Its equity holdings are managed from a value perspective, as are as many asset allocation funds, with about 22% in the financial sector; JP Morgan Chase [JPM *****], Bank of America [BAC *****], and Wells Fargo [WFC ****] were its second-, third-, and fourth-largest holdings as of year-end 2009.