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Introduction | What is the Asset Allocation Process? | Finding the Right Ingredients | No Single Investment Has It All | Correlation | Ideal Asset Allocation | Optimizers

Asset Allocation

Finding the Right Ingredients for the Pie

"Style analysis" is the study of how a fund invests among different asset classes. In the financial press, you will often find references to a particular mutual fund's "position" in certain securities, meaning how much of the fund is invested in a particular security.

To fully understand the conecpt of "style analysis," it is useful to know that stocks fall into different categories. "Growth" stock refers to a company whose revenue is expected to grow more than average. Growth companies tend to reinvest most of their earnings, and therefore pay small dividends while the worth of the stock increases. "Value" stock refers to companies whose assets (a "bird in the hand!") are considered more important than their long-term earning potential. "Income" stocks usually refer to mature companies with stable earnings and dividends. So, a style analysis on a stock fund might show it has a 50% position in large company value stocks, 22% in large company growth stocks, 14% in small company growth stocks, 12% in small company value stocks and 2% in long-term bonds. Although selecting individual company stocks is what makes a fund manager's job exciting, what matters most to you, the investor, is the fund's investment style: how it chooses among asset classes.

Although a fund's investment style can usually be determined from its title (Small Cap Growth, International Bond, etc.) and from the statement of investment goals in its prospectus, these don't tell the full story. Most actively managed funds reserve a high degree of flexibility in making investment decisions. An area of concern for investors is style drift -- in which overzealous fund managers drift away from the fund's stated asset allocation objectives.

For example, if a fund that usually buys large company income stocks (reliable companies with stable earnigns) increases its position in small company growth stocks (value based on potential growth), its performance may look better than other large company funds, because of all those high-growth companies. But it is also taking on more risk, because those companies may not grow as much as forecast. This is why you should be skeptical of cover stories in financial magazines touting "The Hottest Blue Chip Funds." In many cases, the "hottest" fund (which often just means the fund with the greatest return) doesn't look much like a blue chip fund when you see what's in it.

Fortunately, there are ways to get a handle on an individual fund's style. Fund investment and performance histories are widely available. The fund's prospectus will give you some idea of its goal (because fund managers can't stray too far from the stated objectives), and funds publish complete lists of their holdings at least twice a year. The lists may be a few months old by the time you see them, but they give a good indication of the fund manager's practices.


The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.
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