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The Growing Popularity of Allocation Funds

Allocation funds enable investors to gain access to various asset classes within a single investment vehicle

Mara Dobrescu 26 February, 2013 | 11:30AM

With ongoing doubts about the future of the global economy, the ability of multi-asset funds to move easily between asset classes is making these vehicles more popular.

Dynamic asset allocation is a notoriously difficult task for active managers, only a few of whom actually outperform

Allocation funds enable investors to gain access to various asset classes within a single investment vehicle, and to delegate asset allocation decisions to an investment manager. The Morningstar Euro Moderate Allocation category comprises funds with an intermediate risk profile, defined by an equity stake ranging from 35% to 65% of assets.

Performance Anxiety

Dynamic asset allocation is a notoriously difficult task for active managers, only a few of whom actually outperform an appropriate composite benchmark over the long term. For example, although funds in the Moderate Allocation category returned an average of 8.25% over the course of 2012, the category’s composite benchmark (50% Barclays Euro Aggregate + 50% FTSE World TR, in euro terms) returned 12.23%

Nevertheless, managers within this category have a wide range of performance drivers at their disposal. In addition to allocating between equities, bonds and cash, sector calls and bottom-up stock selection can be used to add value into the equity pocket. Within the bond portion of the portfolio, managers can rely on traditional fixed-income plays such as bets on duration, yield curve and the allocation between government debt and higher-yielding securities (corporate bonds, convertibles, emerging market debt, etc.).

Fund Performance in 2012

In 2012, funds with higher equity stakes tended to do better than their peers, as was the case for the Luxembourg-domiciled, Neutral-rated Fidelity Euro Balanced fund (Analyst Research), which returned 23.87% over the period. The fund maintains a fixed allocation of 59% to equities, which is higher than most other funds in the category. Successful stock picks within the equity pocket contributed strongly to the fund’s outperformance. (It's worth noting that this equity pocket replicates the Bronze-rated Fidelity Euro Blue Chip fund (Analyst Research), which is a eurozone equity fund.)

By contrast, the Luxembourg-domiciled, Silver-rated Sauren Global Balanced fund returned only 8.16%, slightly behind the category average. The two experienced managers running this fund of funds select around 40-50 underlying investment vehicles, and rebalance their portfolio regularly to maintain equity exposure at 50%. In practice, this portion is often overweight on European equities, and around one third of it is dedicated to small-caps. Although the fund benefitted in 2012 from strong performances of several funds in its portfolio such as the Silver-rated Alken European Opportunities fund (Analyst Research), others disappointed, which limited the fund’s progression last year. 

The original version of this article was published January 2013 by Professional Wealth Management.

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Alken European Opportunities R193.63 EUR1.79
Fidelity Funds - Euro Balanced Fund A-EUR15.88 EUR0.00
Fidelity Funds - Euro Blue Chip Fund A-EUR19.45 EUR0.00
About Author Mara Dobrescu

Mara Dobrescu  is a fund analyst at Morningstar France.