February 22, 2010
It's About Time for an About-Face for Funds
It's about time mutual fund product developers thought out of the Morningstar investment-style box to give portfolio managers the ability to do an about-face.
One of the most critical discussions to come out of the financial crisis has been the questioning of the rigid investment mandates of mutual funds and the soundness of 60-year-old modern portfolio theory-since correlations between investment classes are obviously becoming more intricately woven in the global economy of the 21st century and the markets are prone to increasingly higher volatility and risk.
The steady march of new fund offerings over the past two years has been interesting, albeit predictable. Bond, emerging market, alternative investment, exchange-traded, absolute-return, hedged, leveraged, short and managed payout/income replacement funds have dominated the mix.
As appropriate as these funds are, a new offering from AllianceBernstein is even more intriguing: a "volatility management component" for target-date funds that gives the investment team the discretion to move 20% of a portfolio from equities and real estate investment trusts into bonds and cash in the face of an extremely challenging market (see "Alliance Bernstein Gives Target-Date Funds 20% Leeway to Manage Risk," page 4).
AllianceBernstein, renown for its stellar research, says that unlike tactical asset allocation, which tries to pinpoint specific asset classes in the short run, volatility management empowers portfolio managers and analysts to look at the bigger picture of risk and return within a larger economic context.
Of course, it remains to be seen whether any of these newly liberated mutual funds will prove they can deliver, but it's worth paying heed to Putnam Investments CEO Robert L. Reynolds' prediction that absolute-return funds will grow from 5% of the mutual fund universe to 25% in just a few years (see "Week in Review," page 4).
Another piece of related news this past week piqued our attention, the formation of the AllWeather Advisory Board to "improve state-of-the-art retirement income solutions for investors" (see "F-Squared Forms Board to Focus on Retirement," page 6). The 16-member board, which includes the famous Dr. Arthur Laffer, says MPT and traditional diversification are insufficient.
We applaud these exciting developments in the industry from forward-looking companies and are absolutely rooting for their success.
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