Morningstar Advisor - December 2012/January 2013 - (Page 7)

Letter From the Editor Dynamics of Funds of Funds The talk of this year’s Morningstar ETF Invest Conference in October was exchangetraded-fund managed portfolios. Over the course of the day-and-a-half gathering attended mostly by financial advisors, five panels were devoted to these strategies, which are essentially separate accounts made up of ETFs. This focus came on the heels of Morningstar reporting that assets of the 490 strategies the firm tracks increased 30% in the first six months of 2012 to $50 billion. The ETF-managed-portfolio business is hot. To us, however, the growth of ETF managed portfolios is interesting for a different reason: It is part of the larger trend of investors outsourcing their asset-allocation decisions and investment selections to professionals who manage dynamic funds of funds. Whether it’s a target-date fund, an age-based 529 plan, ETF managed strategy, or even a fund of funds such as PIMCO All Asset PAAIX, investors are gravitating toward offerings that dynamically alter their asset allocations based on such things as macroeconomic conditions, risk-factor modeling, or the age of the investor. And advisors are leading the charge. The asset flows into ETF managed portfolios are proof of that. So are the aged-based options that are cropping up in advisor-sold 529 plans. Morningstar now has an entire fund-analyst division devoted solely to covering funds of funds. For this issue, the leader of that group, Laura Pavlenko Lutton, presents an overview of this new era (“Outsourcing Asset Allocation,” Page 36). She generally likes what she sees, viewing the move to funds of funds as a step forward for investors, who can easily satisfy their diversification goals. However, she’s concerned that as these vehicles are gaining in popularity, their makeup is becoming more complex. Many funds seem to be experimenting with their assetallocation ideas, sometimes dramatically changing allocations midstream; others are turning to alternative asset classes in attempts to produce better risk-adjusted returns. Next, Andrew Gogerty, the analyst responsible for Morningstar’s coverage of ETF managed portfolios, looks into why these strategies are so appealing to advisors (“ETF Managed Portfolios on the Rise,” Page 41). He views it as a natural outgrowth of the ETF boom. Advisors want greater access to liquid, low-cost investments with a focus on asset allocation and diversification—traits that ETFs are tailor-made to deliver. Finally, analyst Kailin Liu examines the extent to which dynamic funds of funds have invaded the 529 market (“Age-Based Options Take Over 529 Industry,” Page 46). The last holdout? American Funds. One appeal Liu finds in some of these programs, such as the Utah Educational Savings Plan, is that advisors can create the asset allocation and then outsource the rebalancing. It’s clear that dynamic funds of funds have massive appeal to advisors in today’s investing environment. But like any phenom in the investing world, whether they have staying power will be determined by their ability to deliver the long-term results advisors and their clients expect. Stay tuned. Jerry Kerns Follow Jerry on Twitter @ jerrykerns 7

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