| Glossary of
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 The
Money Management Newsletter: Choosing
Financial Services
Portfolios of great funds that automatically
rebalance.... Are they an investment solution?
By Rob Whipp
Money Management Newsletter - June 2003
The prolonged
negative returns of much of the mutual fund market over the past few years
has led many investors to take a sober look at what type of funds they have
been putting their money into and whether or not their holdings actually
suit their risk profile. If the previous investment approach was ad hoc,
flavour of the moment or somehow managed to end up overweight in categories
that are now incompatible with the volatility they are prepared to live
with, some restructuring is in order.
One of the problems with building an investment portfolio is maintaining
its integrity over time because the investments within the portfolio do
not move in tandem as some gain value while others decline. The result is
that the intended weightings get distorted and if they not rebalanced the
portfolio can end up a long way from its originally planned structure.
Another problem is obtaining the desired diversification of asset classes
(stocks, bonds, cash), investment styles (growth, value), economic sectors
and geographic regions with a limited amount of investment capital. Proper
diversification is necessary to help smooth out investment returns and avoid
wild fluctuations (especially downward) in value.
Fortunately help is available for investors who are serious about using
a strict portfolio approach for their hard earned savings. Tremendous computing
ability has been one positive result of the technology boom and some mutual
fund companies have developed programs that can automatically rebalance
a given portfolio as frequently as monthly to maintain the specified weighting
originally selected for each fund. This takes the responsibility away from
the investor or the advisor to continuously monitor the relative performance
of each fund and will ensure that the desired fund weightings are automatically
retained. In addition, the consolidation of many mutual fund companies over
the past few years has left the merged survivors with a much broader range
of quality products to cover investor diversification requirements. .
The combination of computing ability and a comprehensive stable of proven
funds has allowed some fund companies to offer portfolio programs that would
previously only have been available to high net worth investors. Different
portfolios are offered, from the very conservative to the aggressive depending
on the investor's profile as well as comprehensive reporting.
We know that many people have avoided anything to do with mutual funds because
of the negative market conditions but these new products, although quietly
launched, are definitely worth a look. There are of course some tax implications
for non registered accounts where automatic rebalancing can trigger capital
gains. This concern can be reduced in circumstances where an investor can
choose from what are commonly known as sector funds or capital class funds
for the portfolio. In some cases however this choice is not available.
Interested investors should contact their advisor for an update on what
is available and an analysis of what product(s) may best suit their needs.
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