Displaying items by tag: allocation

(New York)

Asset allocation as it has traditionally been conceived has taken a beating over the last few years, and especially since the start of the pandemic. The old 60/40 allocation model has been cast aside for years, and investors are using many new techniques to allocate, such as factoring. However, one easy-to-implement and effective way to think about allocation is the balance of active and passive investments one holds. Active investments, when well done, can offer long-term outperformance. However, they also have more significant risks. Accordingly, this can be the risk/upside portion of a portfolio, while passive strategies, which are almost by definition more diversified, can be more of a hedge.

FINSUM: This not only makes sense in equities, but this consideration about active vs passive holds across different asset classes as well.

(New York)

The Wall Street Journal has published an interesting article giving advice to investors on how to assess, and when to dump, losing mutual funds. The article makes the point that investors should not automatically clear out their losing funds, just like they shouldn’t always buy winning ones. Funds have their own reasons for poor performance and those reasons can have a big impact on whether they should stay in a portfolio. Here are four questions to ask in assessing funds, “Does the fund have a good process in place?”, “Is the manager sticking to his or her own guns?”, “Is there a new manager, and do I trust him or her?”, “Is this negative performance coming in a segment of the market in which it is tough to beat index funds?”.

FINSUM: Good funds can have significant down periods, so it is important to have a methodology for deciding if and when to dump them.

(New York)

The media is reacting very strongly to a new move by Morningstar. The legendary fund rating company has just taken the somewhat surprising move of replacing outside funds with some of its own in its “managed portfolio service”, which allows financial advisors to outsource investment decisions to Morningstar. It will now rely on its own funds as the building blocks of those portfolios. Its own funds will be scored by the company itself, but it says an algorithm will do this. The company’s CIO says “We have structures in place to make sure [investment management] is at arm’s length from research. There is structural separation of research and investment management”.

FINSUM: We think this is a ridiculous conflict of interest, made even sillier by the fact that Morningstar acts like an algorithm is any less biased than a human rating system. As if Morningstar did not write the algorithm in the first place…