(PUB) Investing 2015

10

Moving Between Asset Classes Is Surprisingly Hard to Do The Contrarian | Russel Kinnel

That said, it is no surprise that it’s very hard to shift among asset classes. As Morningstar’s John Rekenthaler found a few years ago, both individual investors and institutions alike are better at pick- ing mutual funds within an asset class than they are at picking asset classes. Most of the returns gap highlighted in my annual “Mind the Gap” study comes from people hopping from bonds to equities, or domestic stocks to foreign stocks, at the wrong time. There’s a lesson there for all of us. It’s tempting to move money from a slow-growing economy to a faster- growing region. The problem is that the news usually is already priced in. It’s not so different from growth stocks and value stocks. Value stocks often need merely to exceed very low expectations to succeed, while growth stocks need to live up to ever-higher expectations, which isn’t easy. In addition, human nature leads us to want to invest in the asset class with the best recent returns and to avoid repeating the mistake of owning the duds. However, markets tend to humble those of us who think we can jump around at the right times. Rather than trying to invest like a master of the universe, consider a couple of extremely boring but effective tactics. Automatic rebalancing essentially takes you in the opposite direction of trend-chasing. Many 401 (k)s now have this option—you just pick how frequently you want to rebalance, and since it’s in a tax-shel- tered account you can do it without tax consequences. You can also enroll in simple automatic investment programs that help provide the discipline to stick with a plan even when markets are scary. Such programs also are handy ways to boost savings levels, as they get your money out of your bank account and into a long- term investment. K

Tactical allocation is hard. Don’t take my word for it; check out the returns for the tactical-allocation Morningstar Category. They lag every other allocation category by a wide margin. That includes conservative allocation, where the equity weighting has to be under 50% ; the moderate-allocation category ( 50% to 70% ); the aggressive-allocation category ( 70% to 80% ); and the world-allocation category, where at least 40% of assets have to be held overseas. (In the allocation section in the fund data pages, we tag the funds with the category abbreviations TV , CA , MA , and AL .) The five-year return on tactical allocation through October 2015 was 3 . 6% annualized, compared with 5 . 0% for conservative allocation, 7 . 8% for moderate allocation, 8 . 3% for aggressive allocation, and 4 . 6% for world allocation. As I said, it’s a wide margin. Three of the four tactical-allocation funds in the Morn- ingstar 500 are in the red for the trailing three years and one is in the red for the trailing five years. That’s pretty brutal given how strong returns have been in U.S. equities and most developed markets over that time period. We define tactical allocation as strategies that make frequent shifts among asset classes and sectors. These funds often claim they can achieve better returns by moving to the right markets and asset classes at the right time. Yet, to look at them, that flexibility has been more curse than blessing. I’m not too surprised by the results, but I am surprised at how few tactical-allocation funds have competitive returns. Quite a few have been wary of U.S. equities and underweighted them at a time when they’ve had strong returns. Some have also made aggressive bets on emerging markets at a time when they’ve lagged.

Our Contrarian Approach I go against the grain to find overlooked funds that may be ready to rally.