Success in 2012 took many forms.
Asset-allocation funds are hardly new. The fund industry has been combining stocks, bonds, and other securities in a single offering for decades. But asset-allocation funds have been growing in both sophistication and assets under management in recent years, and in 2012, these funds got their own Morningstar Fund Manager of the Year category.
The skippers of asset-allocation funds have earned their own Fund Manager of the Year category because they’ve gone well beyond the 60%/40% stock/bond mix to demonstrate portfolio-construction skills that go beyond picking and combining individual securities. They have effectively combined asset classes to help investors meet big goals, whether they’re saving for retirement or aiming to lower volatility in a broader portfolio.
The 2012 nominees aptly illustrate the range of strategies that were successful not just this year, but over the longer term as well. The managers all have a few fundamental things in common: All run funds with holdings stemming from more than one asset class, such as stocks, bonds, commodities, real estate, cash, and so forth. All have received a Morningstar Analyst Rating of Gold, Silver, or Bronze, indicating that Morningstar’s analysts think the funds will outperform their peers on a risk-adjusted basis over a full market cycle. And all delivered peer-beating returns in 2012, as well as over longer-term periods.
Beyond those basic similarities, the managers’ approaches differ quite dramatically. Some combine individual securities while others use a fund of funds structure. Some of our nominees employ macro calls, using newfangled vehicles, while others are old-fashioned fundamentalists. These varying approaches demonstrate that there was more than one way to deliver winning returns in 2012--and beyond.
Here are the allocation nominees:
Team From Dodge & Cox Balanced
Year-to-Date Return Through Dec. 14, 2012: 15.84%
Category Rank (Percentile): 2
Patience paid off in 2012 for the managers of this moderate-allocation fund. The seasoned team has the flexibility to alter its stock/bond mix, and in recent years, it has kept its equity stake at more than 70% of its assets. That’s near the maximum of its 25%-75% equity range and more than 10 percentage points ahead of its typical category peer. In a year when equities have outperformed bonds, the fund’s returns now land near the top of the moderate-allocation category. With the notable exception of troubled computer-hardware maker Hewlett-Packard HPQ, the funds’ top picks--most of which have been in the portfolio for years--also put up good numbers, giving the fund an additional edge.
To be sure, these managers haven’t always looked so good, and fund investors have lost patience at times when the fund’s calls have been too early or painfully wrong in the short term. The fund posted a steep 34% loss in 2008 and also trailed the category as recently as 2011. Over longer periods, however, the fund’s record is strong. The managers here are backed by a tested process and thoughtful stewards of capital at Dodge & Cox. It is this long-term perspective and investors-first approach that gives us the conviction to award Dodge & Cox Balanced a Morningstar Analyst Rating of Gold and a nod for Fund Manager of the Year in 2012.
The Team at JPMorgan SmartRetirement Target-Date Series
Average Series Year-To-Date Return Through Dec. 17, 2012: 14.59%
Average Series Category Rank (percentile): 7
This series of funds for retirement investors has been making a name for itself. The management team, led by Anne Lester, arguably operated with two disadvantages in 2012. For one, its allocation to equities is at or below the industry norm across the series of funds, and its lineup of underlying funds lacks the star power seen at other key competitors. Even so, Lester has picked from the best of JPMorgan’s lineup and in 2012 correctly tilted the series’ asset allocation toward larger-cap stocks and high-yield bonds to push returns well ahead of the pack.
Indeed, Lester’s tactical moves largely have been right over the years, contributing to series returns that have been competitive in bull markets, like 2012’s, while also offering decent downside protection in rockier markets. As such, the series has built up a compelling longer-term record and has attracted a growing stream of assets. Among the dozens of target-date series available to 401(k) plans, this is one of Morningstar’s favorites.
Rob Arnott of PIMCO All Asset
Year-to-Date Return Through Dec. 14, 2012: 13.43% and 15.52%
Category Rank (Percentile): 10 and 2
These funds have made the most of their broad mandates. Under Rob Arnott’s leadership, these world-allocation funds draw on PIMCO’s strong inventory of funds with an absolute return mandate--stay 5 to 6.5 percentage points ahead of the Consumer Price Index over a full market cycle. The All Authority version has extra powers: It may use leverage to hedge risk. Recently that’s meant 30% gross leverage in the portfolio, mainly to offset the fund’s equity and augment market-neutral exposures.
Wide-ranging strategies can be especially difficult to execute consistently well, but for the most part, Arnott has done a nice job keeping the funds in the right place at the right time. In 2012, Arnott’s commitment to emerging-markets debt has given returns a boost, though he’s also been helped by solid performance from the funds’ underlying PIMCO strategies. The funds’ success in the shorter term as well as the longer term is especially impressive on a risk-adjusted basis relative to other globe-trotting allocation offerings. Both funds earn Morningstar Analyst Ratings of Gold.
David Giroux of T. Rowe Price Capital Appreciation
Year-to-Date Return Through Dec. 14, 2012: 13.58%
Category Rank (Percentile): 6
At T. Rowe Price Capital Appreciation, David Giroux runs a fund with a straightforward asset-allocation mandate and a sophisticated menu of investments. This fund avoids market-timing and sometimes keeps a stash of cash, but its success in 2012 owes in part to an equity-heavy approach earlier in the year. A handful of picks gave the fund an even greater edge, including Cooper Industries, which was acquired by Eaton ETN at a premium, and top equity holding Thermo Fisher Scientific TMO, up 42% for the year-to-date period. Giroux also made good use of the fund’s stake in leveraged loans, especially the exposure to debt at Dunkin Brands DNKN, as well as its covered calls on stable growers. These moves have pushed the fund well past the moderate-allocation category norm in 2012.
Since Giroux joined this fund in June 2006, it has beaten 95% of his category peers to deliver top-decile returns on a risk-adjusted basis, and it has earned a Morningstar Analyst Rating of Gold. The fund has a solid risk/reward profile, capturing strong gains when the market offers them while avoiding some of the downside when returns are falling. Giroux has made good use of T. Rowe Price’s investment and allocation committee structures, as well as a deep bench of analysts. (Before his run as manager of this fund, Giroux was an industrials analyst at the firm.)
Jerome Clark of the T. Rowe Price Retirement Target-Date Series
Average Series Year-To-Date Return Through Dec. 14, 2012: 14.00%
Average Series Category Rank (percentile): 5
Manager Jerome Clark skippers a $77 billion target-date series, T. Rowe Price Retirement, that’s unapologetically equity-heavy. T. Rowe maintains that retirement investors need more exposure to stocks to overcome the risk that they’ll outlive their savings. This stance stung the series in 2008’s market crash, but its funds have recovered nicely since. Clark has not altered the series’ overall approach to asset allocation at a time when some other managers have backed off from more-aggressive policies. The average fund in the series (including more bond-centric funds designed for those nearing retirement) is up 14% for the year-to-date period, and only two of the 12 funds in the series have a category rank below its category’s top decile (and even those two are in their peer group’s top quartile). The series’ five-year record is among the best in the industry.
The series’ equity stake explains some of the strong performance in 2012, but solid contributions from the series’ underlying funds, as well as Clark’s correct moves with the series’ tactical-allocation budget, gave the series its edge in 2012. Clark uses 17 T. Rowe Price funds in the series, 12 of which earn Morningstar Analyst Ratings of Gold, Silver, or Bronze. In 2012, Clark tipped the series even more toward stocks, as well as high-yield, another high-performing asset class in 2012.