9
Morningstar FundInvestor
September
2013
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
