Posts Tagged ‘balanced fund’

There is no denying the important role that balanced mutual funds play in one’s investment career. Whether you are a hands-on investor or someone who would prefer to have no involvement whatsoever when it comes to investment management, the right balanced mutual funds can easily find a home in your portfolio. In fact, many investors will hold funds that are managed by their favorite fund manager, and what better place to test a fund manager’s true skill than in a balanced fund.

What better place to test a fund manager’s true skill than in a balanced fund.

As discussed at length elsewhere on this site, the idea of balanced funds is to achieve above-average returns (as measured by some standard, either an index, a combination of indices, or some other standard like LIBOR-plus x%) either through tactical asset allocation or strategic asset allocation strategies. In a tactical asset allocation fund, the fund manager will shift between income assets and equity assets depending on how the manager “sees” the markets heading. In a strategic asset allocation fund, the fund manager ensures that the assets of the fund remain within their prescribed limits (e.g. 25% income class, 75% equity class) and will make adjustments once the assets deviate from this strategy.

Okay, with that out of the way, let’s take a closer look at the importance of balanced mutual funds in everyone’s portfolio, but especially for the hands-off investors.

For the investor who has properly positioned his or her portfolio the way he or she wants it and actually maintains some form of involvement in the investment account, holding a top-performing or top-ranked mutual fund can provide a great deal of insight into the investor’s own abilities. If the investor is astute enough, he or she will find a balanced fund that closely reflects his or her own portfolio or, better yet, his or her target time date. For example, if you know your investments are for retirement and that you are going to retire in the year, say, 2030, then finding a Target-dated balanced mutual fund that mirrors your risk tolerance and investment objective can be quite easy to do. Holding such a fund and comparing your existing portfolio’s performance against the performance of the mutual fund can be humbling and educational. In instances where performance returns vary greatly, you can see exactly where you fell short.

For the hands-off investor, the balanced mutual fund offers a great opportunity to take advantage of the best skills and asset management that money can buy. Best part is that you do not have to pay, directly, for this elevated level of expertise and skill… well, you sort of pay, but it is proportionate to the amount of money you invest. So, if you invest $10,000 and it grows to $20,000, you give up as much as 2.0% (or marginally higher, but you get the idea) annually. That means you will have to give up $400 for that year. The more you portfolio grows, the more you pay.

But let’s take a closer look at this. Let’s say you decide to invest in one of Franklin Templeton’s Target dated portfolios, we’ll go with Target A for fun. In this case, you would pay roughly $100 in fees (which comes out of your asset value, not out of your pocket) and in return you would have a Franklin Templeton VP with more than 20 years of experience at the company (3 years with this particular fund) managing your money. Imagine that. Better yet, consider that this particular fund has extremely low risk given the returns it proves you annually…

Now consider this, especially if you are a hands-off investor:

If someone told you that you could have the VP of one of the largest fund companies in the world managing your money before you read this, what would you have done? Laughed? Thought that person was nuts?

Now you know. The VP of Franklin Templeton will not only manage your money, no matter how much (or little) you have to invest, but he will only charge you 0.5% (or up to 2% elsewhere). And if the VP of Franklin Templeton can’t get it right when it comes to balanced mutual funds (or any other funds for that matter) what does that tell you?

Think about that…

And please share this article with your friends

The idea of tactical asset allocation when it comes to your mutual fund investments can mean a couple of things. Either way, it will involve some risk taking on your part as the investor. However, in saying as much, remember that the nature of mutual fund investments is to diversify out the risks by holding several properly-qualified securities in the first place, so the risks are not so much in the security selection as they are in the strategy itself. Let’s take a closer look at the two types of mutual fund investments…

Tactical Asset Allocation Means Making A Call On Asset Classes

In the most basic sense of the word, tactical asset allocation involves taking an overweight-underweight approach to specific asset classes. For example, if you have noticed that equity markets are starting to come off their lows and have surpassed a safe margin (say 20% above their lowest 52-week trading range) you might decide to adjust your equity position accordingly. A tactical asset allocation program might go overweight on equities if the program calls for such action (which would be determined far-ahead of time, not arbitrarily).

For many people, the above example would be a natural call to increase equity weightings. However, contrarian strategies would advocate taking an underweight position in equities and an overweight position in fixed income. Whatever decision you make if you choose to undertake a tactical asset allocation program should be determined well ahead of time, and not at the time that the market records such milestone increases (or decreases) from its highs/lows.

The risks here are that you choose the wrong funds as well as the wrong asset class weighting.

Tactical Asset Allocation Can Also Mean Active Security Management

Tactical asset allocation need not be solely undertaken by the individual investor. In fact, most balanced funds use tactical asset allocation to manage their returns, beat the index and keep investors happy. This is nothing new for most balanced funds, as many of them will invest more heavily in income investments when yields suggest opportunities exist to easily out-perform the index and will invest more heavily in equities when prices are considered undervalued. (There are many different ways of describing this type teeter-totter relationship between income and equities; bond-strong fund managers may manage solely based on yield curve or other bond-specific measurements whereas equity-strong managers may manage based on P/E ratios, dividend payouts, as well as a long list of other equity-specific measurements).

The risks involved with balanced mutual funds that make tactical asset allocation a part of how the fund operates lies with the fund manager. All it takes is one bad decision and reversing those misfortunes can be a devastatingly slow and painful process. Consider for example a balanced mutual fund that manages $5 billion worth of money where the fund manager decided to move 80% of the assets into bonds. If the timing was wrong or if the call itself was wrong and the manager needs to reverse this decision, he or she will need to trade upwards of $4 billion in assets, a truly substantial figure that would not go unnoticed by other traders.

The point is simply that a balanced fund manager’s goal is to outperform an index, whether it is the S&P 500 or some other index or a combination of several, the goal is just that: to outperform. In fact, their pay is often determined by how well they outperform the index or other standard, which is why tactical asset allocation involves accepting only the necessary risk to achieve above-standard returns.

Tactical asset allocation involves accepting only the necessary risk to achieve above-standard returns

With the above in mind, remember that returns are always risk-adjusted. It makes little sense to arbitrarily manage your personal portfolio using tactical asset allocation if it “might” mean a healthy return in one period, but five consecutive poor returns that follow. Incorporating tactical asset allocation programs up front is another matter; it becomes part of your asset allocation model, or your investment plan. This means that, right from the start, you will be investing in mutual funds (or other vehicles) that allow you to achieve your investment objective.