Morningstar Advisor - December 2012/January 2013 - (Page 36)

Spotlight Outsourcing Asset Allocation By Laura Pavlenko Lutton Thanks largely to advisors, dynamic funds of funds are taking their turn in the spotlight. T. Rowe Price Balanced RPBAX has the trappings of a vintage moderate-allocation offering. It’s a straightforward asset-allocation fund with a fairly static 60%/40% stock/bond mix. After growing quickly through the mid-1990s and then surging again in the early 2000s, its asset growth has stalled. In fact, the fund has lost about 10% of its assets to outflows since 2008, and Morningstar’s analysts stopped following the fund in 2011. Interest has shifted elsewhere not because this fund is a dud. It sports a 4-star Morningstar rating, and its 10-year record is in the peer group’s top quintile. Even so, it looks a little pedestrian relative to more dynamic offerings that have been on the rise, like target-date funds with their 40-year glide paths and super-slick ETF managed portfolios. In an era when many financial advisors are outsourcing their investment selection, it appears that fancy funds of funds are sparkling. Seeing the Roots Since then, when employees enroll in a 401(k) plan and don’t select specific investments for their retirement savings, they most often end up in the target-date retirement fund whose target year falls closest to their 65th birthday. In the years leading up to that date, the fund’s asset allocation shifts, so it owns less equity and more fixed-income and cash investments. No need for the 401(k) participant—or an advisor— to rebalance the assets along the way. Instead, that task is delegated to the professional fund manager. The concept of outsourcing one’s asset allocation is being popularized elsewhere, especially in 529 college savings plans. Since 529 plans began to blossom in the early 2000s, most have enhanced their age-based options. These investments are structured like a target-date retirement fund: College savers choose the 529 plan’s age-based option that corresponds with the child’s current age or their high-school graduation year. As the child nears the college enrollment year, 529’s age-based tracks typically move quickly into cash and bonds, to preserve the higher-ed nest egg. Age-based tracks are understandably popular in 529 plans that are sold directly to college savers, who want to choose a “set it and forget it” investment. But as Kailin Liu points out in “Age-Based Options Take Over 529 Industry” (Page 46), age-based tracks have been just as popular in 529 plans sold through advisors. Amping Up the Complexity As funds of funds with shifting asset allocations have become more common, their insides are increasingly less so. The target-date retirement funds have been using their series as laboratories for new ideas in asset allocation, especially after the funds posted steep losses in 2008’s market slide. On average, target-date funds lost one fourth of their value that year, leading to broad criticism from regulators, elected officials, and retirement-plan participants alike. Many series have since tweaked their asset allocations to include nontraditional asset classes that aim to diversify the series’ returns stream and produce better risk-adjusted returns. A Morningstar study in 2011 found that 11 of the industry’s largest series included diversifying asset classes such as commodities, natural-resources, energy, and preciousmetals funds. For example, Vantagepoint Milestone, a series owned only by the public employees that Vantagepoint serves, includes a long-short fund. DWS LifeCompass’ ultra-diversification strategy includes a market-neutral strategy and dedicates assets to energy stocks through a sector ETF. And T. Rowe Price created T. Rowe Price Real The concept of a fund of funds isn’t a new one. It’s been employed at T. Rowe Price Balanced and other asset-allocation funds for decades. But the idea of more-dramatically altering a fund’s asset allocation over time went mainstream in 2007 when the U.S. Department of Labor qualified target-date retirement funds as default investments in defined-contribution plans. 36 Morningstar Advisor December/January 2013

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

Morningstar Advisor - December2012/January 2013
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