Morningstar Advisor - December 2012/January 2013 - (Page 42)

Spotlight How Morningstar Classifies ETF Managed Portfolios Universe Asset Breadth Portfolio Implementation Primary ETF Exposure Type Global International United States All-Asset Alternative Balanced Equity Fixed Income Hybrid Strategic Tactical Broad Market Sector Country/Region All-Inclusive result, firms evolved—and continue evolving— from a client advisory practice toward the small, boutique money-manager model commonly seen in the traditional separate account industry. A Reference Guide So what makes ETF managed portfolios hum? ETFs trade intraday so managers can quickly and cost-effectively change, sometimes in dramatic fashion, the profile of a portfolio. For example, a manager can swap U.S. large-cap stock exposure for dividend-paying, emerging-markets small-cap equities by trading one position in SPDR S&P 500 SPY for another in WisdomTree Emerging Markets SmallCap Dividend DGS. Meanwhile, a traditional equity portfolio would go through potentially hundreds of individual stock trades to replicate the same exposures. Because it’s so easy for an ETF managed portfolio strategist to do a tactical about-face, advisors need additional information on these strategies beyond the typical holdingsbased analysis. In January 2012, Morningstar introduced a new classification system that shows investors what philosophies and objectives drive this growing crop of investment strategies. Our classification system relies on our analysis of the investment strategy as well as a review of these firms’ historical portfolios. Some strategies invest solely in equities or fixed income but provide broad exposure across the Morningstar Style Box; others are built around a total portfolio concept, emphasizing risk or global diversification with some alternatives blended in. To determine a portfolio’s classification, we start with its investment universe, move on to the type of assets in which it invests and the process it uses to implement its strategy, and finish with the type of ETFs the strategy uses. We dive deeper into each attribute below. Universe which of these asset classes will primarily drive returns. To classify strategies within this attribute, we analyze historical portfolio asset allocations and review, if available, a strategy’s investment policy benchmark or starting portfolio. All-Asset: These strategies typically have the widest and most flexible mandate when investing in ETFs across asset classes. In reviewing the portfolios, we designate this attribute to strategies that consistently held more than 10% in assets other than cash, equity, and fixed-income securities. Alternative: Alternative strategies typically seek returns uncorrelated to traditional equity and fixed-income markets by attempting to remove one or more asset betas or return drivers. Strategies with this attribute designation include long/short or other alternative strategies, including currencies. Balanced: The return drivers for these strategies are a combination of equity and fixed-income exposure on a dedicated, ongoing basis. These strategies typically have a 30% to 70% allocation to equities. Equity: These strategies primarily feature long or beta-type exposure to equity securities. We ignore whether the underlying ETFs use leverage. These strategies typically have at least a 70% allocation to equities. The first attribute describes where a strategy intends to invest. We assign the strategy to a universe based on where the ETF is investing, not the domicile of the ETF itself. Global: These strategies have the opportunity to add exposure to any market across the globe and have historically used such flexibility. International: International portfolios primarily use ETFs providing exposure to non-U.S. equity and fixed-income securities. United States: U.S. portfolios primarily use ETFs providing exposure to U.S. equity and fixed-income securities. Asset Breadth The classifications within this attribute indicate a strategy’s primary asset-class exposure or returns driver. These selections don’t indicate that the whole portfolio is, for example, invested in equities or bonds, but rather 42 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

Morningstar Advisor - December 2012/January 2013