Target-date funds have grabbed the spotlight (and assets), but this screen can root out allocation funds upon which you can rely.
This article originally appeared in the April/May 2012 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000.
Allocation funds haven’t been too popular lately. Investors looking for broadly diversified investments have instead latched onto target-date funds, which tend to own a wider range of securities and conveniently downshift away from equities as investors near retirement (and have made big inroads into retirement plans). However, allocation funds can still be appealing; they often highlight the abilities of one manager or team, while target-date funds typically spread their assets among a large number of managers.
Morningstar divides allocation funds into four categories based on their level of equity exposure and exposure to non-U.S. stocks: aggressive allocation (70%–85% stocks), moderate allocation (50%–70% stocks), conservative allocation (20%–50% stocks), and world allocation (at least 40% in non-U.S. equities and at least 10% in bonds). This Morningstar Principia screen helps identify funds from these categories that boast experienced managers, modest costs, and fine records while keeping risk in check.
( Morningstar Category = Aggressive Allocation
Or Morningstar Category = Moderate Allocation
Or Morningstar Category = Conservative Allocation
Or Morningstar Category = World Allocation )
And Special Criteria = Distinct Portfolios only
And Purchase Constraints does not equal Closed-New Investment
And Purchase Constraints does not equal Qualified Access
And Min. Initial Purchase <= $10,000
And Analysis does not equal NA
And Manager Tenure (Longest) >= 5 years
And % Rank Category 5 year <= 25
The next step is to limit the pool of candidates to funds where at least one manager’s been at the helm for five years and that have outpaced a minimum of three fourths of their category peers over that period. While we have sometimes extended these criteria to 10 years, the tumultuous market environment of the past five years makes for an impressive proving ground for investors.