Asset allocation hinges on goals, risk tolerance

MUTUAL FUNDS

January 23, 1994|By WERNER RENBERG | WERNER RENBERG,1994 Werner Renberg

Several readers have asked questions about asset allocation, such as:

* "Just what is asset allocation?"

* "Do you need to worry about asset allocation if you plan to be invested for many years?"

* "An adviser told me I should be 40 percent in stock, 40 percent in bond, and 20 percent in money market funds. Since stocks perform the best over the long run, shouldn't I have more in stock funds?"

Such questions are timely as well as important since this is the time of year when investors give -- or should give -- their mutual fund portfolios an annual review to see whether funds have been performing about as expected or whether changes are needed.

When in your review you calculate what your fund accounts added up to Dec. 31, with the help of the year-end statements of your fund accounts, you need to take an additional step: Figure out how much of the total was in equity, bond and money market funds -- in other words, how your fund assets were allocated.

How you allocate your financial assets among the three major classes of securities -- stocks, bonds and money market instruments, or the mutual funds that own them -- can determine to a high degree how well your portfolio performs.

The case for appropriate asset allocation can be stated simply: To help achieve satisfactory portfolio performance with lower volatility than an all-stock portfolio.

But what would be "appropriate" asset allocation for you?

That would depend partly on your goals and your ability to tolerate market risk -- which in turn depend on your age, investment horizon, financial situation -- and partly on the outlook for securities markets.

It may be helpful to see how professionals allocate assets. Consider, for example, asset allocation funds -- they're called flexible portfolio funds by Lipper Analytical Services -- whose managers are able to shift money among the three asset classes. (One of the better performers, in fact, might be worth investing in.)

Stock allocations ranged from 45-50 percent for Fidelity Asset Manager, Phoenix Total Return and Carillon Capital, to 90 percent or higher for IDS Managed Retirement and Dreyfus Strategic Investing.

Bond allocations ranged from zero or near zero for Dreyfus, Phoenix and IDS funds, to 40-50 percent for Fortis Advantage Asset Allocation and MetLife-State Street Managed Assets.

How can these funds' allocations differ so much?

For at least three reasons: differences in investment objectives (growth or total return), the basis for allocation decisions and the flexibility and skill at characterizing their securities selections.

Two of the top funds -- Vanguard Asset Allocation and Stagecoach Asset Allocation -- derive their allocation signals from similar computer models run by their managers, Mellon Capital Management Corp. and Wells Fargo Nikko Investment Advisors, respectively.

Converting securities statistics into expected long-run returns for stocks, bonds and money market instruments, the computers generated projections last fall that led both funds to be 70 percent in stocks and 30 percent in bonds. A more aggressive WFNIA-run fund, Overland Asset Allocation, became 100 percent invested in stocks.

Other funds have been giving stocks less weight.

Robert Beckwitt, portfolio manager of Fidelity Asset Manager, reached his maximum permitted 60 percent stock allocation in May and pared stocks to 45 percent in the second half as he expected "only moderate movement" in the stock market. At the same time, he bought foreign debt securities, nearly doubling his bond portion from May's 20 percent.

Michael R. Yogg allocates the assets of the MetLife-State Street fund, split 54-46, by dividing money among eight categories, each managed by a specialist: stocks of large and small capitalization growth companies; value, international and inflation hedge stocks; high grade, high yield and foreign bonds.

At the Fortis fund, split 56-42 in mid-January and co-managed by Dennis M. Ott and Stephen M. Poling, Ott has invested about half of the bond portfolio in high-yield bonds. Despite high stock prices, he says, "Steve continues to find interesting areas" among growth stocks.

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