Follow the Gurus in Asset Allocation

Studies have shown that asset allocation is the most important determinant factor in a mutual fund's performance: according to a study by Gary Brinson, Randolph Hood and Gilbert Beebower, asset allocation strategies are responsible for over 90% of variations in portfolio performance.

The tumultuous 2008 taught us an important lesson: static asset allocation over diversified assets is not effective enough to shield us from severe market loss. What's called for is tactical asset allocation which re-allocates capital based on the current and future economic and market conditions. In previous articles, we introduced several tactical asset allocation strategies including cross-asset momentum strategies. Those strategies are based on quantitative price or value evaluation. Another way is to simply follow the great investors' asset allocation decisions.

Asset allocation in investment is akin to capital allocation in business. Great asset allocators, though not as famous as great stock pickers such as Warren Buffett, are widely followed by the public based on their asset and sector calls.

Unfortunately, other than in a few large institutions, such information is random and untimely for most public investors. What we need is to develop a platform so that we could identify a few gurus and then follow their asset allocations consistently.

The following table lists a few great investors who have done very well in terms of their asset allocation in the past several years:

Manager	Fund
John Hussman	HSGFX, HSTRX
GMO Jeremy Grantham	GBMFX, GGHEX
Steven Leuthold	LCORX
Ivy Asset Management	WASAX
James Advantage	GLRBX
PIMCO Rob Arnott	PASDX
Vanguard Asset Allocation or Wellesley Income	VAAPX, VWINX
Janus Balanced	JABAX
TFS Market Neutral	TFSMX

There are several ways to follow the gurus' asset allocation decisions.

• Use the mutual funds quarterly filing (N-Q) and figure out the asset allocations of those funds managed by gurus. One could use Morningstar or Lipper's mutual fund services (free information on Morningstar.com) for this purpose. The major drawbacks are (a) the information is updated only quarterly (thus no information during the quarter) and usually late; and (b) the assets classified by these services are just the major assets such as stocks and bonds, not as much as other important asset classes such as emerging markets, high yield debts etc.
• Invest in clone funds such as IndexIQ's recently introduced ETF QAI or Hedge Macro Index Tracker MCRO. Investors could also tap some institutional funds such as Morgan Stanley's hedge fund replication Altera.
• If you want to follow the gurus' decisions and construct your own portfolios based on the information, our Guru Allocation Watch service could be useful. Over there, users could find out the real time asset exposures for a given mutual fund. We use our advanced proprietary beta regression technique to analyze the funds' price behavior to derive the up to date asset exposures for a given set of asset indexes. In addition to individual fund asset exposure finding, we also provide a live strategy called Guru Asset Allocation Clone which bases on the derived up to date asset allocations for a list of famous asset allocation funds to invest in a diverse set of assets including US equities (such as SPY or IWM), foreign equities (EFA), emerging market equities (EEM or VWO), US REIT (IYR or VNQ), commodities (GSG or DBC and gold - GLD) and various fixed income assets (HYG or JNK, CFT, LQD, SHV, SHY, IEF, TLT, TIP, MBB, BWX, PCY).

A natural question that arises here is how to select great asset allocation gurus and their funds. We are planning to release asset allocation fund ranking in the near future.

From time to time, we will comment on gurus' asset outlook based on our asset allocation analysis. It is especially important right now as markets are in a critical juncture.

Disclosure: No positions

Comments

[SteadyEddie:]

I signed up many investment newsletters. Most are famous: valueline, prudent, turnaround etc. The result: I could have been better off buying index funds. I then realized the big boys have been doing differently: they went global, they dug deep to bonds, currencies, ... I'm with you on the asset allocation and a need to serve small boys like us (your service is for public investors like us, isnt it). Keep up the work and now we will see how useful it is.

Aug 17 12:07 PM

[Independent...:]

Why not hire these managers by investing in their funds? Several of these are no-loads and have performed relatively well during '07/'08. I think a component of diversification that is lost on many investors is diversification of strategies. I think we can sometimes get too caught up in trying to achieve the optimial mix of asset classes when diversification of strategy could allow you to include a respectable long/short fund like Hussman Growth and a respectable global allocation fund like Ivy Asset.

I'd like to add a couple more respectable funds to your list: BlackRock Global Allocation (MDLOX) and a conservative allocation fund: Berwyn Income (BERIX).

No matter the strategy, at some point every manager (or team) will experience a period where they don't look as though they know what they're doing. The important thing is to know their strategy and decide if you are willing to stick it out or not. If you blend strategies (bearish managers with opportunistic managers, style managers with go-anywhere managers) in addition to blending asset clases, your portfolio is more likely to hold up better during market down turns.

Aug 17 01:13 PM

[MTRIG:]

The issue with IndexIQ is the volume. You will get stuck in a trade. As of today at 2:51 PM there have been NO TRADES on their ETFs. The concept is good, but the volume is so low, or non existent that is an issue to get in or out at a good price, or in at all.

Aug 17 02:52 PM

[MTRIG:]

Asset Allocation of a bunch of mutual funds from different fund families will end up in the following.

1. Most investors cannot but funds from all these families that you listed.
2. If you use Fidelity you can purchase all these funds but it will cost you $75 to buy and $75 to sell. You are better off using ETFs or find one company (Fidelity, or another fund family) where you can implement a concept such as Ivy Portfolio.

Aug 17 02:55 PM

[ValidFi:]

Several problems in investing mutual funds

1. the redemption period restriction: usually ranges from 3 months to half year. That makes it very hard.

2. Tax issues: you incur too much tax when you switch from one fund to another. Investing in the underlying index funds or ETFs will result in trading activities but since you are just trimming or increasing one particular holdings, your tax bill will be lower (however, your trading commissions may be higher since you have to readjust your whole portfolio often, so find a low commission broker)

ValidFi does have MALOX (Blackrock Global Allocation R). As of 8/13/2009, it has about 51% allocation (40% in US total equity VTSMX and 11% in VGTSX) in equities and the rest in fixed income. Just type MALOX to quote and click on Asset Allocation Analysis. You could also do BERIX analysis in the same way.

It is also interesting to select good allocation funds (such as with 1 year Sharpe) to a strategy such as Sharpe Dynamics for Equities. That will do what you mentioned: to directly invest into those best funds while pruning out some of them which are performing poorly recently.

Send us email to [e-mail] if you have further questions.

Thanks


On Aug 17 01:13 PM Independent in Greensboro wrote:

> Why not hire these managers by investing in their funds? Several
> of these are no-loads and have performed relatively well during '07/'08.
> I think a component of diversification that is lost on many investors
> is diversification of strategies. I think we can sometimes get too
> caught up in trying to achieve the optimial mix of asset classes
> when diversification of strategy could allow you to include a respectable
> long/short fund like Hussman Growth and a respectable global allocation
> fund like Ivy Asset.
>
> I'd like to add a couple more respectable funds to your list: BlackRock
> Global Allocation (seekingalpha.com/symbo...) and a conservative
> allocation fund: Berwyn Income (seekingalpha.com/symbo...).
>
>
> No matter the strategy, at some point every manager (or team) will
> experience a period where they don't look as though they know what
> they're doing. The important thing is to know their strategy and
> decide if you are willing to stick it out or not. If you blend strategies
> (bearish managers with opportunistic managers, style managers with
> go-anywhere managers) in addition to blending asset clases, your
> portfolio is more likely to hold up better during market down turns.

Aug 17 08:21 PM