Asset allocation requires continual updating of the investment mix

July 05, 1995|By ANDREW LECKEY

Asset allocation -- the investment buzzwords of the 1990s.

An army of investment firms and professional advisers would love to be in charge of allocating your assets. This requires that you give them free rein to divide up a portion of your money in order to weather the vagaries of the modern financial world.

It's a handy way for investors to avoid getting personally involved in the continual juggling of their holdings. But don't be misled into thinking all asset allocation delivers identical results.

The investment mix varies considerably among those doing the managing or advising. They decide the optimum weightings in stocks, bonds and money-market instruments based on conditions, opportunities and your goals as they perceive them.

For example, though many experts believe interest rates will be declining, there's no consensus on how exactly to divide up portfolios as a result. It's also possible to lose money, depending on the specific investments chosen.

Disgruntled holders of many asset allocation mutual funds learned that last year when returns declined.

Here are some bullish asset allocation strategies for 1995:

* Andrew Pratt, one of the managers of the Montgomery Asset Allocation Fund, which is up 30 percent in total return over the past 12 months, holds a mix of 48 percent stocks, 47 percent bonds and 5 percent cash. Weightings are largely dictated by a technical model.

* Gregory Sullivan, president-elect of the International Association for Financial Planning, recommends holding a number of mutual funds in a mix that represents 50 percent U.S. stocks, 20 percent overseas stocks and 30 percent bonds. He sees rates coming down, boosting the stock market.

* Charles Clough, chief investment strategist for Merrill Lynch & Co., espouses a capital appreciation mix of 55 percent stocks, 35 percent bonds and 10 percent cash, "but I wish we had more bonds" because he sees rates falling.

* Fidelity Asset Manager Fund, flagship of Fidelity's three Asset Manager portfolios, has 41 percent in stocks, 26 percent bonds and 33 percent short-term investments of three years or less.

The portfolio, which suffered a decline last year because of an unfortunate foray into Mexican equities, recently had 13 percent foreign exposure.

The asset allocation concept was hatched in the institutional market, as giant pension funds sought ways to methodically improve returns over time through technical and fundamental analysis.

The boom has hit its stride in the 1990s with individual investors. For example, in 1993 total assets of asset allocation mutual funds jumped from $13 billion to $31 billion, as novice investors chose a "one-stop shopping" approach so they didn't have to make the choices. The total is now more than $40 billion. Some funds employ little strategy other than making sure risk is divided among a number of investments.

Why let others decide your holdings? Why not do it yourself? The answer depends on how diligent you are.

"If you have the time and temperament, you can be your own asset allocator, but many investors have neither," said Mr. Sullivan, also the president of the Sullivan, Bruyette, Speros & Blayney financial planning firm in McLean, Va. "This is really just a process to help people diversify in order to get a better risk-adjusted rate of return."

Mr. Sullivan notes that many investors purchase several funds with identical purposes rather than spreading around the risk. Financial planners help clients avoid that mistake, he said.

Whether handled through an adviser, a mutual fund with asset allocation goals or done on your own, every strategy needs updating. All the professionals interviewed for this column significantly changed their allocations over the past six months.

"We quantitatively devise a model on a monthly basis and portfolio managers meet to review the findings and its recommendations," explained Mr. Pratt of Montgomery Asset Allocation Fund, recently heavily weighted in telecommunications, computer software, health care and financial services stocks. "We usually stick with the model's recommendations on asset allocation."

Merrill Lynch revises its model only about three times a year.

"Our asset allocation strategy is usually boring and we try to make it boring," laughed Mr. Clough, who expects bond rates to decline another 0.5 percent and thinks stocks and bonds will prosper. "We like financial stocks such as Chemical Bank, airlines such as AMR Corp. and technology firms such as Intel Corp., as well as 30-year Treasuries and zero-coupon bonds."

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