Even the experts disagree on the proper mix of assets for mutual funds


March 01, 1992|By WERNER RENBERG | WERNER RENBERG,1992 Werner Renberg

If you've invested in mutual funds in accordance with an asset mix that seemed right for you -- say, 65 percent stock funds, 25 percent bond funds and 10 percent money market funds -- the booming stock market may have thrown your asset allocation out of whack.

Stock funds now may account for 70 percent of your portfolio.

Watching market indexes setting new records but reading that some analysts regard stock prices as high in relation to companies' earnings, you may wonder whether your "overweighting" leaves you vulnerable in case of a correction.

Should you reallocate your assets by selling some of your stock fund shares and putting the proceeds into the other funds?

It's a good question. To answer it, you really have to ask yourself other questions, such as these:

* Is your investment horizon long enough to make a 70 percent position in equity funds acceptable?

* Could you moderate your portfolio's risk level by switching from higher-risk to lower-risk equity funds instead of by changing the equity fund allocation?

* How attractive do you find the potential returns -- and how worrisome the risks -- of bond funds vs. those of equity funds?

* Unless you're in IRAs, would the potential benefits of switching outweigh the tax you'd pay on capital gains if you sell?

In considering such questions, you might expect to get some insights from the strategies used by the professionals who run asset allocation funds. These funds, which make up almost all of the group called flexible portfolio funds by Lipper Analytical Services, typically aim to maximize total return by investing in what the managers regard as optimum blends of stocks, bonds and cash.

Regrettably, they don't agree on what's optimum.

Bob Healy, manager of IDS Managed Retirement Fund, and James Rullo, manager of Boston Co. Asset Allocation Fund, are close to 80 percent in equities. (They've trimmed back from recent levels of 85 and 100 percent, respectively.)

Patricia Dunn, president of Wells Fargo Nikko Investment Advisors, is at the other extreme, with about 30 percent in equities and 70 percent in bonds in Stagecoach (formerly Wells Fargo) Allocation Fund. So is Robert Beckwitt, whose Fidelity Asset Manager is at 30 percent equities, 25 percent bonds and 45 percent cash.

Differences such as these reflect different perceptions of the outlook for financial markets, of shareholders' risk tolerance and of allocation methods.

Some managers, mindful of how returns from stocks have exceeded those from bonds or cash, allocate most of their assets to equities.

Other funds, designed for investors with lower tolerance for risk, have limits. Fidelity Asset Manager, for example, can go up only to 50 percent stocks. (For those able to accept the risk, Fidelity has introduced Fidelity Asset Manager Growth, which can be fully in stocks.)

Prudential FlexiFund's Conservatively Managed Portfolio not only has lower equity targets and higher quality standards, but also lower bond maturity limits than its Strategy Portfolio.

Methods run from informal, subjective analysis to rigorous adherence to sophisticated computer programs.

"When I feel strongly about bonds, I go in and visit with Steve," Dennis M. Ott, co-manager of Fortis (formerly AMEV) Advantage Asset Allocation Portfolio, says, referring to Stephen M. Poling, his co-manager. (The fund is now 60 percent in bonds.) "When Steve feels strongly about stocks, he comes in to visit with me."

That's the description -- perhaps slightly exaggerated -- of one informal, subjective method.

Another who says he uses only subjective analysis is Robert Milnamow, portfolio manager of Phoenix Total Return Fund. "I would never use a quant model," he says.

Which is precisely what Wells Fargo Nikko and Mellon Capital Management, investment adviser to Vanguard Asset Allocation Fund, rely on heavily. In fact, they use essentially identical mathematical models, into which they feed their respective long-term returns from stocks, bonds and cash, as well as other variables.

Apparently, different inputs have resulted in different outputs. The Mellon model ranged between 60-40 and 40-60 stocks vs. bonds in 1991, and ended the year at 50-50, while the WFNIA model called most of the year for only 20 percent in stocks.

Performances differ widely among the funds, not only because of the different allocations but also because of the differences in their securities selections and operating costs.

Studying these funds, you may decide to invest in one to complement your portfolio instead of worrying about reallocating.

If so, confine your search to leading performers, including those that came close to matching the Standard & Poor's 500 Index. Remember, although their bond holdings may have held down their performance, they also moderated the funds' volatility.

Funds that have provided, say, 80 percent of the index's return -- around 10 percent for the last three years, 20 percent in 1991 -- while being only 65 percent as volatile would be worth


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