Asset allocation funds take advantage of market shifts



When Robert Beckwitt was a high school student in Cherr Hills, Colo., his grandfather stimulated his interest in the stock market by showing him how technical analysts pick stocks with "point-and-figure" charts, which track a stock's upward or downward momentum.

By the time he was a Princeton senior, he could write a thesis on the usefulness of a variety of technical market indicators.

Now that he is dealing in real money -- as portfolio manager of Fidelity Asset Manager and four other Fidelity mutual funds -- Beckwitt uses more sophisticated value concepts to invest in stocks, bonds, and money market instruments.

And it's paying off. Asset Manager's assets have increased from zero to $5 billion in less than five years. Meanwhile, its annual rate of total return has averaged 15 percent.

Asset Manager and its younger growth- and income-oriented siblings are three of the asset allocation funds that have been conceived in the years since the 1987 stock market crash.

Together with other funds that may switch among classes of financial assets, they are classified as flexible portfolio funds by Lipper Analytical Services. There now are about 80 in the group, with assets exceeding $14 billion as of March 31 -- an increase of about 20 funds and $6.5 billion in group assets in one year.

Three basic premises underlie asset allocation funds (and the desirability of diversifying any portfolio's assets):

1. Bonds or money market instruments may excel in periods when stocks, the best-performing asset class over the long run, do poorly.

2. To maximize a portfolio's long-run performance, timely changes should be made in asset allocation among the three principal classes.

3. A portfolio invested in the three classes is likely to be less volatile than one invested in stocks alone.

Allocations of these funds are especially of interest now when some people -- maybe you, too -- are unhappy with the returns expected from all three asset classes.

Beckwitt, for example, had Asset Manager invested 59 percent in stocks, 21 percent in bonds, and 20 percent in money market instruments as of May 31. Those figures represented a significant increase in stocks and a drop in bonds over the last several months.

How did he come up with 59 percent -- only 1 percent less than the maximum that his fund's policy permits him to invest in stocks -- when stock prices were near all-time highs?

By analyzing three broad questions: Which asset class offers the best values? Is the Federal Reserve pursuing an easier or tighter monetary policy? And is investor sentiment positive or negative?

His conclusions: U.S. stocks were most attractive even if their price-earnings ratios were "a bit stretched." He had to assume the Fed would be in an easing phase until it raised interest rates. And the sentiment of individual equity investors, as reflected by surveys, was a positive factor.

Different judgments are required at Wells Fargo Nikko Investment Advisors, which manages the Overland Express and Stagecoach Asset Allocation Funds, and Mellon Capital Management Corporation, investment adviser to the Vanguard Asset Allocation Fund.

The two firms rely on computer models to change the funds' mixes. As variables required by the models become available, they are fed into computers, which then use them to revise projected long-term returns on stocks, bonds and money market instruments and, in turn, to make new allocation recommendations.

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