Morningstar Advisor - December 2012/January 2013 - (Page 38)

Spotlight Asset Growth of Dynamic Funds of Funds $ Billion Target-Date Series 529 College Savings Plans ETF Managed Portfolios these portfolios cover a host of strategies and have grown quickly—to nearly $50 billion of assets. ETF managed portfolios have developed a following among advisors because they can be added to portfolios through separately managed accounts or unified managed accounts, which can be cheaper or more-flexible than traditional mutual funds. The most-established managers are Windhaven Investment Management and Cougar Global Investments, which together control about one fourth of the ETF-managed-portfolios industry. But many smaller players are benefitting from the enthusiasm for these flexible, fast-moving strategies. Staying Power? 500 $451.0B 400 300 200 $157.6B 100 $49.6B 2008 2009 2010 2011 2012 Target-date and 529 plan data as of Oct. 31, 2012 ETF managed portfolio data as of June 30, 2012 investments can’t overcome their costs. Thus far, Vanguard has demonstrated it can more than keep up with complex designs, but indexing’s tailwind has been steady and strong in recent years. Advisors Embrace ‘Solutions’ The rise of complex funds of funds certainly makes sense for individuals who arguably are less willing or able to combine an effective, well-diversified portfolio. But even professional investors—individual advisors and institutions—have shown that they have an appetite for these all-in-one investments. This hunger has grown since 2008’s downturn put big dents in clients’ portfolios and made many advisors fear for the viability of their practices. The fund industry—especially at firms selling primarily through advisors—have been quick to launch what they call “solutions”—many of which are funds of funds designed to give client portfolios an all-weather feel. More than 400 share classes of funds of funds have been launched since 2008’s market dive. Take JPMorgan Diversified Real Return, which was launched in March 2011 and is run by the team behind the firm’s successful target-date series and other asset-allocation funds. Its fund-of-funds structure includes strategies with inflation-managed bonds, commodities, real estate, natural resources and a real-return objective. It has gathered $68 million of assets in its first 18 months, without a lengthy retail track record. Though not technically a fund-of-funds solution, funds from Dimensional Fund Advisors are becoming more popular with advisors. DFA has an all-in business model where advisors exclusively use DFA funds in their clients’ portfolios. DFA has risen in assets to the fund industry’s top 10 as clients use the firm’s quantitatively driven funds to create customized fund-of-funds portfolios for clients. What may be even more striking is the rise of ETF managed portfolios, which are similar in concept to open-end funds of funds, but often include tactical asset-allocation components. As Andrew Gogerty details in “ETF Managed Portfolios on the Rise” (Page 41), Expectations are high for fund-of-funds strategies, with both individuals and advisors. Studies of retirement-plan participants have indicated that many believe that their target-date retirement fund will support their retirement spending needs—regardless of how much they contribute to their 401(k) plan. That’s probably too good to be true, but advisors are increasingly finding a role for funds of funds in client portfolios. Whether the advisors are ultimately satisfied with the funds’ outcomes remains to be seen. As many fund firms (and, undoubtedly, advisors) have discovered, combining funds to produce a desired stream of returns is much more difficult than back-testing and logic would suggest. But the broad diversification goals behind funds of funds are sound and a step forward for investors. K Laura Pavlenko Lutton is director of fund-of-funds research with Morningstar. 38 Morningstar Advisor December/January 2013

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

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