Morningstar Advisor - December 2012/January 2013 - (Page 55)

Burns: Paul, the role of fixed income in the portfolio is also undergoing dramatic change. For so long, it was the ballast, but are we in a place now where fixed income is the risk and not the reducer of risk? Hatch: Fixed income is such a broad category today. Thirty years ago, a lot of the retail investing in fixed income was Treasuries and munis. Today, I see much broader market, and it is because of the low-rate environment. I don’t believe that fixed-income allocations are going to go down, not in the U.S. As our population gets older, fixed income will continue to play a very important role in clients’ portfolios. As interest rates eventually go higher, how we manage that will be important. But people don’t look at fixed income the way they did before. Most advisors today use it for income and they use it because they’re trying to control overall lost. Burns: But it’s incredibly challenging for an advisor. There are folks in the boomer generation who were overallocated to equity, whether it was in their 401(k) or elsewhere. They come out of that and… Hatch: Now, they’re overallocated to fixed income. Burns: But how do you tell somebody who’s moving from accumulation to decumulation, hey, from an asset-allocation risk standpoint, the math says more fixed income. From a price fundamentals standpoint, the math says less fixed income. How are advisors solving this? It’s a very strong tension. Hatch: Being an advisor has always been a If you just do a straight analysis—this is how much money you have, this is the your goal, there’s the straight line that says how you’re going to invest it, and historically this is what happened, we ran Monte Carlo—they don’t care! In the end, what you say is, “We’re going to put 50% of your portfolio in fixed income, because that means tomorrow you’re not going to come here and take all your money out and go put it in the back yard.” Now, if that’s what advisors have to do to do that, that’s what we do. Most advisors are trying to do the very best job they can for their clients. It’s better for them than just giving up and saying, “Go take the money and put it in a money market fund,” which every day that our clients do that is another day that they’re going to have to take more risk in the future in order to get the returns they need. So I think most of them are using fixed income to get clients comfortable. The reality is most of our clients are probably underallocated to equities and will be underallocated for the next two decades. K Scott Burns is director of fund research with Morningstar. Morningstar Advisor Magazine—Don’t Miss an Issue! Subscribe for FREE today! Call +1 888 235-0828 or visit MorningstarAdvisor.com Reach the advisor audience. Reserve your ad space today: February/March 2013: Active Investing: The days of the index-hugging active manager are coming to an end. With the proliferation of low-cost index funds that provide pinpoint exposure to any area of the market, today’s active managers must prove they have the skill to differentiate themselves to justify their fees. We look at concepts such as active share, search for the best active managers, and debate the role true active strategies have in a portfolio. Ad Close: Dec. 14, 2012 Materials Due: Jan. 4, 2013 For more information, contact: Mary Uribe, Mary.Uribe@morningstar. com, +1 312 384-3811 Online media kit: combination of cold-blooded analysis and cold-hearted reality. We have to be both a professor and a psychologist to work with our clients. There’s an old saying, “You help your client invest to the sleeping point.” What kind of risk does the client want to take, so that when they wake up in the morning that they don’t freak out every day. www.morningstar.com/aboutus/ mediakit.html MorningstarAdvisor.com 55 http://www.MorningstarAdvisor.com http://www.morningstar.com/aboutus/mediakit.html 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