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PERSONAL FINANCE / Bill Sing

New Type of Fund Takes Care of Diversification

January 16, 1988|BILL SING

Seeking a convenient way to diversify their holdings, investors have been pouring money into a relatively new type of mutual fund that does the job of diversifying for you.

Called asset allocation funds, these funds spread their portfolios into a wide variety of investments, including domestic and foreign stocks and bonds, government securities, gold bullion, gold stocks and real estate stocks. Thus, they give investors with as little as $1,000 a piece of several different investment sectors, far more diversification than these investors would get allocating the money on their own.

Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change, hoping to shift more money to sectors that are hot at the time.

The lure of this one-stop method of diversification has made these funds among the fastest-growing and most-promoted mutual fund groups today.

"If fund groups don't have an asset allocation fund, they're going to try to get one," says Don Phillips of Mutual Fund Values, a Chicago investment advisory service.

"It's wrong to be totally committed to U.S. stocks; you need more diversification than that," says Sheldon Jacobs, editor of No-Load Fund Investor, a newsletter in Hastings-on-Hudson, N.Y. "This is one way to get it."

One of the fastest-growing asset allocation funds has been USAA Cornerstone, which gained 9% last year. Its assets had risen to about $600 million from only about $50 million a year ago, after giving its investors a whopping 40.8% return in 1986 and about 37% last year before the crash whittled its return back to single-digit levels.

But like any new investment fad, these funds have their share of drawbacks.

First, because they are so diversified, they are rarely going to be among the top performers of all mutual funds. That is because some components of the fund have a tendency to perform in opposite directions, canceling each other out somewhat. Gold, for example, may rise when stocks fall, and vice versa.

"These funds are never going to be at the top of the mutual fund performance lists," says Reg Green, editor of Mutual Fund News Service in San Francisco. Funds that take more risk by concentrating in one sector are likely to be at the top--or bottom--of such lists, Green says. The advantage of asset allocation funds, he says, are their reduced volatility and steadier returns.

Also, the funds can still lose money if stock and bond markets get hit hard. While most asset allocation funds outperformed stock funds in the October crash, some--like USAA Cornerstone--nonetheless lost money after the crash.

National Strategic Allocation Fund, for example, declined about 10% between the stock market peak in late August and Dec. 23, according to Lipper Analytical Services. The decline for funds on average in that period was 14.25%. The fund allocates its portfolio into four sectors--U.S. equities, foreign securities, precious metals and fixed-income securities.

Also, skeptics contend that asset allocation funds that try to shift their investment mix to profit from changing market conditions are going to fail much of the time. If managers guess wrong, performance suffers.

"You're depending on the (fund manager's) ability to know what investment sector will do well," contends David Sargent, chairman of the investment committee for United Mutual Fund Selector, a Boston-based newsletter. "The history of investments shows that they won't know how to do it any better than you will."

"We really don't think anyone can time the markets," says Harry W. Miller, a portfolio manager for USAA Cornerstone. It instead allocates about 20% of its portfolio into five categories--gold stocks, foreign stocks, real estate stocks, U.S. government securities and basic value stocks--and aims to stay within 16% and 23% in each sector.

Various studies have shown that such diversification over time can pay off, Miller says. Over the past 17 years, for example, the Bailard Biehl & Kaiser Diversified Portfolio Index (consisting of 20% U.S. stocks, 20% bonds, 20% foreign stocks, 20% Treasury bills and 20% real estate) has outperformed the Standard & Poor's 500-stock index. However, the index may not always outperform the S&P 500 over other periods.

With their strengths and drawbacks in mind, Jacobs of the No-Load Fund Investor newsletter recommends two asset allocation funds: USAA Cornerstone (800-531-8000) and Blanchard Strategic Growth (800-922-7771). Both funds are no-load, which means they charge no sales commissions.

Blanchard Strategic Growth, unlike USAA Cornerstone, seeks to shift assets between its four sectors (U.S. stocks, foreign securities, precious metals and bullion, and U.S. fixed-income securities) to capitalize on cyclical shifts. The fund was up 14.87% in 1987 through Dec. 23.

Other asset allocation funds include National Strategic Allocation Fund (800-223-7757), BB&K Diversa Fund (415-571-6002), Permanent Portfolio Fund (800-531-5142), Dreyfus Capital Value (800-645-6561), Value Line Strategic Asset Management (800-223-0818), Oppenheimer Asset Allocation (800-525-7048) and Paine Webber Asset Allocation (800-544-9300).

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