(PUB) Morningstar FundInvestor

September 2013

Morningstar FundInvestor

9

floundered lately. Bronze-rated Leuthold Core Investment LCORX and Leuthold Asset Allocation LAALX , for example, lagged the majority of their respective moderate-allocation and aggressive-alloca- tion peers from 2010 to 2012 . And in 2013 , Core is around its category’s middle, while Asset Allocation is in its category’s basement. Conservative-allocation fund Hussman Strategic Total Return HSTRX , once a favorite of investors because of top-flight showings in the middle of the past decade, can’t seem to get out of its own way. Although it held up well in 2011 ’s choppy market, it has badly lagged its peers in the rising markets of 2009 , 2010 , 2012 , and (thus far) 2013 . The quantita- tive models Hussman employs to compare current economic and market data with historical conditions (and measure how the market has subsequently performed) have struggled in the post-bear-market environment. A substantial stake in gold-mining firms has also hurt. The fund earns a Neutral rating. Sometimes allocation funds are held back by moves made by managers of other funds. Gold-rated PIMCO All Asset and Silver-rated PIMCO All Asset All Authority PAUDX , both managed by Robert Arnott, performed superbly on a relative basis in 2011 and 2012 , but each lands in the world-allocation catego- ry’s bottom quintile in 2013 through mid-August. Their struggles are due in part to PIMCO ’s emphasis on Treasury Inflation-Protected Securities within its bond portfolios in 2013 ; these bonds have declined significantly in price since the uptick in interest rates in May. Indeed, the firm’s flagship, PIMCO Total Return PTTRX , lags most of its peers this year. In addition, Arnott has been bullish on emerging markets and bearish on the U.S. to the point where he was shorting U.S. stocks in All Authority. That’s been a recipe for trouble lately, but it’s the same bias that has helped the funds in prior years. Then there’s the fund that makes virtually no moves at all: Permanent Portfolio PRPFX , which has stuck for three decades with a 20% allocation to gold, 5% in silver, 10% in Swiss francs, 15% divided between real estate and natural-resources stocks, 15% in aggres-

sive growth stocks, and 35% in U.S. Treasuries. The Neutral-rated fund rode a rise in metals prices and a Treasury bond rally for much of the previous decade, and investors piled in. But the fund’s virtually static portfolio left it unable to avoid the virtually inevitable decline by those securities; a sharp drop in metals’ fortunes and Treasuries’ recent woes have left the fund far behind its conservative-allocation peers since the start of 2012 . Fees Are Key to Success There’s plenty of evidence that costs are a good predictor of future returns, so it’s no surprise that they play a significant role in our Morningstar Analyst Ratings for allocation funds, where the range of long- term returns historically has been narrower than among all-equity funds. Given today’s low bond yields, that’s quite likely to remain the case. There are 51 funds across the aggressive-allocation, moderate- allocation, conservative-allocation, and world-alloca- tion categories that earn medals, and 39 of them earn Positive ratings for Price. Of the 27 allocation funds that earn Neutral or Negative ratings, only seven get Positive scores for Price. The seven include BlackRock MultiAsset Income BAICX , Fidelity Balanced FBALX , and John Hancock Lifestyle Con- servative JILCX (as well as the aforementioned Hussman Strategic Total Return and Permanent Port- folio). We aren’t sufficiently confident that the investment teams at these funds can outperform despite the built-in head starts they get from the funds’ below-average costs. So when choosing allocation funds, picking one that has both stock- and bond-selection expertise and below-average fees should put you ahead of the game. And if you choose a tactical fund or fund of funds, recognize that there will be times when most or all of the moving parts may misfire at the same time. œ Contact Greg Carlson at greg.carlson@morningstar.com