Morningstar Advisor - December 2012/January 2013 - (Page 37)

Assets specifically for use in its target-date and 529 plans’ age-based options, illustrating how the firm’s asset allocators are driving an important part of the fund-development agenda at the staid firm. Among the more-unusual approaches to asset allocation can be found in Invesco Balanced-Risk Retirement and PIMCO RealRetirement, both of which focus on generating real returns and limiting tail risk close to retirement. While the two series’ goals may be similar, they’re designed quite differently. The Invesco series uses a risk-parity approach, attempting to smooth out returns by equalizing the risk of equities, bonds, and commodities, using leverage in some areas. Meanwhile, the PIMCO series features diversifying funds such as PIMCO Real Return PRTNX and PIMCO Commodity Real Return Strategy PCRPX, along with an active hedging strategy. Time will tell which approaches yield strong returns amid lower volatility. Interestingly, of 25 the target-date series that Morningstar has rated, DWS LifeCompass has been one of the worst performers, suggesting that the series’ ultra-diversification strategy has not been well-executed. Others that have been more successful on the performance front are JPMorgan SmartRetirement, American Century LIVESTRONG, and MFS Lifetime—all of which are run be experienced asset allocators who have included a decent stable of funds to employ in their series. Overall, they’ve been successful in recent years choosing the series’ underlying holds and getting some of the broader asset-allocation calls right. It’s also worth noting that the target-date series with the best overall series rating from Morningstar’s analysts as of November is Vanguard Target Retirement, which runs a fully passive series and has done extensive research on portfolio diversification. The firm argues that adding in alternatives and other smaller asset classes won’t help returns over the long term because those Fund Research for the Future by Scott Burns Over the past several years, much of the investing story has remained the same. Sure, the players have changed, but the themes of uncertainty, income, diversification, and low-return expectations have remained fairly constant since the market recovered in 2009. While the investing landscape has remained the same, the ways in which people are putting their money to work is undergoing radical changes. As a result of this shift, we at Morningstar took a hard look at how we thought about the world and how our research team was organized. The question that we continued to come back to was: Are we organized for 10 years ago or 10 years from now? It is fairly evident from the fund flows that the future is already upon us. New technologies such as exchange-traded funds, unified managed accounts, and target-date funds are hauling in a greater share of the “next invested dollar” with every passing day. Also, an increased focus on fiduciary relationships is challenging existing fund-distribution models and breaking down decades-old barriers and share-class systems. Combined, the technology and the sentiment are changing the way investors of all sizes are gaining access to managers, whether they be active or passive. Simultaneously, investors are also facing an ever-increasing menu of options beyond traditional active managers and index funds. The rise of fund-offunds options and alternative strategies can be directly traced back to this need to control risk and outsource the allocation decision. Recognizing that change is afoot, Morningstar took a look at the way we approach the job of fund research. Over the past 25 years, thinking in the vehicle silos of open-end mutual funds, ETFs, closed-end funds, and non-listed offerings served us well and aligned with how investors looked at the world. Times are changing now, and investors and even asset managers are no longer limiting themselves by vehicle type. In fact, more often than not, the vehicle choice is a tertiary decision made after the strategy has already been well-vetted by the investor. With that in mind, we reorganized our core fund research teams. Gone are teams based on mutual funds and ETFs. Instead, we created two new research teams: active and passive. This vehicle-agnostic approach will allow us to cover an investing strategy, with the same analyst, regardless of what vehicle is used to gain access to the strategy. Likewise, as the investment menu broadens, we now face the exciting challenge presented to investors in the form of funds of funds and alternatives. These investment strategies defy decades worth of codification and analysis either by being all “over the grid” or by definition “off the grid.” In light of that, we elevated our fund-of-funds and alternatives research teams to a status on par with our active and passive research teams. This recognizes not only the growth potential for these areas, but also the need for continued education and new research elements to address these different markets. In the future, the question will not be “what is the best mutual fund or ETF?” but rather “what is the best investment strategy for my needs?” By organizing our research teams into active, passive, fund of funds, and alternatives, Morningstar is better positioned to help investors for the next 10 years and beyond. For Morningstar, the future is now. Scott Burns is director of fund research with Morningstar. MorningstarAdvisor.com 37 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - December 2012/January 2013

Morningstar Advisor - December2012/January 2013
Contents
Contributors
Letter From the Editor
What Stands Between Me and Stupid
Why Do You Use Dynamic Funds of Funds?
Serving Clients and Community
How to Pick an ETF Managed Portfolio Strategy
Tactical View of Risk
Investments á la Carte
Investment Briefs
Unbundling ETF Managed Portfolios
Risks Loom Over Telecom Industry
Outsourcing Asset Allocation
ETF Managed Portfolios on the Rise
Age-Based Options Take Over 529 Industry
How the Landscape for Advisors Is Changing
Mark Egan Embraces Volatility
Alpha, Beta, and Now … Gamma
Performance Gaps
Gains in Momentum
Companies Where Management Teams Add Value
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Once and Future King

Morningstar Advisor - December 2012/January 2013