Stevenash - How Many Mutual Funds Do You Recommend For Your Clients?

[EnlightenedChosenOne]

3? 5? 10? 100?

 

How do you structure a typical client's asset allocation? I'm here to take notes.

[EnlightenedChosenOne]

Steveyboy, where'd you go? I saw that you replied TWICE in the other topic yet ignored this one?

[stevenash]

Just got to my computer - have been gone-  How many mutual funds?  Not that simple.  Sometimes mutual funds are not used. Other times mutual funds are used exclusively by those incapable of constructing a portfolio with adequate diversification that will provide alpha to the client. Go through pretty extensive discussion with client on risk/reward before making recommendations.  I have portfolios with several mutual funds and others with none.   But in actuality, shouldn't I be asking you that question so I know what the proper procedures are?  After all, I am just a glorified salesman and you are a highly compensated individual in a competitive industry.  But honestly, if you think you are setting a trap here, you would be well served to go in another direction.

[EnlightenedChosenOne]

Some clients have several mutual funds eh? Would that include multiple large cap strategies benchmarked against the S&P? Or maybe some small cap? Maybe sector specific mutual funds? ie.. Healthcare, TMT, Utilities?

 

What's your views on the current interest rate environment and how should investors best position their selves in the search for yield? What trends are you seeing in this asset class?

 

 

Just got to my computer - have been gone-  How many mutual funds?  Not that simple.  Sometimes mutual funds are not used. Other times mutual funds are used exclusively by those incapable of constructing a portfolio with adequate diversification that will provide alpha to the client. Go through pretty extensive discussion with client on risk/reward before making recommendations.  I have portfolios with several mutual funds and others with none.   But in actuality, shouldn't I be asking you that question so I know what the proper procedures are?  After all, I am just a glorified salesman and you are a highly compensated individual in a competitive industry.  But honestly, if you think you are setting a trap here, you would be well served to go in another direction.

[EnlightenedChosenOne]

Also, what's your views on active management vs. passive?

 

For the accounts with no mutual funds, are you investing their assets directly into equities, index funds and/or etfs?

 

I'm genuinely curious

[stevenash]

The investment community is evenly split on active management vs passive management.  If you are an equity only manager there is about a 70% chance that you will underperform as compared to your benchmark index on a consistent basis over long time periods.  There might be 2 years out of a five year period when you outperform while you underperform the other 3.  For most of the people I deal with, active vs passive is not the biggest concern.  Its making them understand how much risk they are taking to achieve a desired rate of return and evaluating what the chances are that the stated amount of risk will generate that return.  If one client says he has X dollars and wants to have those dollars generate an income of X dollars at some point in the future, you have to make a return assumption that will make that principal and income goal possible.  Once that is done, you must come up with an asset blend that has historically generated that return.  Then a Monte Carlo analysis will give a good indication of the likelihood of achieving the goal.  THis could be discussed for hours with the biggest variable being the stated risk tolerance of the client versus what one perceives as his actual risk tolerance- those two are often a long way from each other

[EnlightenedChosenOne]

Fair enough.

 

Have you looked into unconstrained fixed income for any of your clients? It might be several years away before retail catches on, its picking up steam on the institutional side.

 

Essentially, its a "best ideas" portfolio that's benchmark agnostic. Investment grade, high yield/junk, mbs, bank loans, all durations, domestic, emerging, etc. Way more flexible than the Barclays agg. Traditional bond funds will get crushed once rates begin rising whereas unconstrained can be a bit more tactical in its allocations

 

 

THis could be discussed for hours with the biggest variable being the stated risk tolerance of the client versus what one perceives as his actual risk tolerance- those two are often a long way from each other

[stevenash]

That has been available to retail investors for a considerable amount of time.  However, if your double dip scenario is what you truly believe in, bonds would be the preferred investment available.  The funds that you describe simply attempt to mitigate interest rate risk by taking on credit risk, liquidity risk,  and rating risk to name a few.  Furthermore, this approacah can be achieved by purchasing individual issues of credit instruments as opposed to doing it via funds which have no maturity value and hence no promise of return of original principal.