By Danielle Sottosanti June 24, 2011
This is the third article in a three-part series on how advisors perceive and use mutual funds.
More than one third of advisors plan to allocate the most assets to domestic equity, but advisors are increasing their allocations to global equities, an Ignites and FundFire survey shows.
Roughly 36% of advisors queried said they plan to allocate the most assets to U.S. equity. That was the most popular response in a 12-question confidential survey administered by Ignites and its sister publication FundFire to more than 185 financial advisors.
Last year, 42% of advisors also said they plan to allocate the most assets to domestic equity, making it the most popular response in a similar survey.
Meanwhile, more advisors are upping their exposure to global allocations. About 25% of advisors said they plan to allocate the most assets to global equities, up from 18 % last year, making it the second most popular response in the survey.
Industry experts offered a range of explanations for advisors’ domestic equity and global allocation plans.
“It’s natural they are going to talk about domestic equities. That’s their bread and butter,” says Ken Majmudar, chief investment officer at Ridgewood Investments. The advisors polled are speaking to their adherence to a traditional asset allocation approach, he says. “They are not deviating and trying something totally different. They are sticking to their game plan,” he says.
In 2010 many people were still shunning domestic equity funds, says Tom Roseen, a senior analyst at Lipper.
But that began to change as the market recovery continued, and domestic equity funds received $7 billion in inflows for 2010. Such products had received $53 billion in inflows in 2011 as of June 15, compared to $26 billion in non-domestic equity, the data shows. “Two thousand eleven is where we have seen a change in heart, mind and soul,” Roseen says.
In terms of domestic equity, fund companies appear to be actively responding to interest in that sector through a series of fund launches. In the first quarter, 41 large-cap, 24 small-cap and nine mid-cap fund share classes were launched, Lipper data shows. Fund firms such as Eaton Vance and Neuberger Berman rolled out new large-cap value funds, while Ariel Investments and Bridgeway Capital Management introduced small-cap value funds.
The European debt crisis, China “tapping the brakes,” Japanese disasters and “just the fact that they haven’t focused on domestic” could be contributing to advisors’ focus on domestic equity, Roseen says.
To be sure, many advisors are interested in bypassing the style box approach to domestic equity investing and are opting instead to use unconstrained strategies, whether it be an all-cap approach or an absolute-return strategy that takes a tactical approach to equity investing. Indeed, 24% of advisors said the top new products they are interested in are all-cap and unconstrained equity strategies.
Steven Rogé, a portfolio manager with R.W. Rogé & Co., says his firm made a conscious decision to allocate more funds to flexible and unconstrained strategies, including those that invest in domestic stocks, over the past two years but has been doing it longer. “We have shied away from investing in style boxes and [are] opting for more flexible options,” he says. The managers who run flex funds are looking at allocation on an asset-class-to-asset-class and company-to-company basis, he explains.
Advisory Research, a Chicago-based investment manager, has seen advisors take a growing interest in global equity strategies, according to Jonathan Brodsky, managing director.
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The Ignites and FundFire survey found that advisors are setting their sights less on emerging-market equities. Roughly 5% said they will allocate the most assets to that class, compared to 13% in last year’s survey.
About 12% of advisors plan to focus on fixed income, the survey shows, compared to the same percentage in last year’s survey. The most recent survey breaks down the category into domestic, emerging markets and international fixed income. About 7% of advisors said they would allocate the most assets to domestic fixed income, 4% said emerging markets and 1% said international.
Meanwhile, more advisors this year said they plan to allocate the most assets to international equities. About 5% said they plan to allocate the most to that asset class, compared to 2% in last year’s survey.
Most advisors surveyed said they plan to increase their allocation to ETFs and alternatives, but not mutual funds.
About 49% of advisors said they plan to increase their allocation to ETFs, while 10% said they plan to decrease and 40% said they will keep their allocation level the same. Comparatively, 33% said they plan to increase their mutual fund allocation, 16% said decrease and 51% said no change.
There’s a trend toward ETFs overall because they tend to be low-cost and tax efficient and the proliferation of strategies makes them attractive to clients and advisors, Majmudar explains.
Indeed, advisors’ interests in ETFs are largely seen as one of the reasons why assets under management in these passive-oriented vehicles exceeded $1 trillion in December 2010.
About half of the advisors surveyed said they plan to increase their allocations to alternatives, whereas 10% said decrease and 42% said no change.
Brad Alford, an advisor and chief investment officer of Alpha Capital Management, believes that alternatives should account for up to 30% of one’s portfolio or higher, as the strategies “make money in a volatile or down market.” Alford runs two alternatives mutual funds.
Though the advisors surveyed by Ignites and FundFire plan to allocate the most assets to domestic equities, Alford sees now as a tough time to put money in equities.
“It seems like a very difficult time to invest in equities given their big run-up in the last two years… as well as adding to fixed income, given that interest rates are near an all-time low and QE2 ending,” he says.