How do advisors pick mutual funds for clients, given the sheer number of funds out there?
“The economy is sputtering and is not on its own feet, so in this kind of environment, you have to look for alternatives,” says Peter Lowden, CFA and chief investment officer for The Enrichment Group in Miami, Fla., an advisory firm founded in 1987 with 15 employees and $215 million in assets under management.
A new wave of better-constructed alternative funds has come out recently, sort of a version 2.0, he adds. “They tend to be younger funds, but the quality is there.” An example is the Litman Gregory Masters Alternative Strategies Fund [MASFX], a multi-strategy fund that employs the talents of four highly skilled managers, Lowden says. “They’ve packaged what we feel is a good lineup of firms, and also good strategies,” he said.
Lowden also likes the John Hancock Global Absolute Return Strategies Fund [JHAIX], a single-manager fund. “They’re hitting lots of bunts and singles and taking little profits,” so the risk profile of JHAIX is attractive, Lowden maintained.
Walter Klisiwecz [Kle-shevits], CFP, of Albany Financial in Albany, N.Y., tries to assess risk tolerance and when the money will be needed. He likes Vanguard’s Total Stock Market Index Fund [VTI], a mutual fund “that essentially spreads the risk out. It’s very low cost for clients and the internal expenses of the fund are low. The performance has been quite good; I believe last year it was around the 15 percent range.”
He also likes the Pimco Unconstrained Bond Fund. “Pimco is one of the top fund managers in the country. There are a lot of concerns about bonds after decades of great returns, and it can go anywhere within the bond market. I have faith in their management.”
Jon L. Ten Haagen, CFP, RFP, and founder of the Ten Haagen Financial Group, Inc. of Huntington, N.Y., worked for Paine-Webber before starting his own firm in 1993. He likes American Funds because they’re diversified with more than 20 choices for sub-accounts and they have a multi-manager platform. “If one guru leaves, there’s not a crisis, and they’ve got some of the lower fees in the industry.”
He also likes Transamerica Asset Allocation Funds, which are managed by Morningstar. “Morningstar was hired by Transamerica Asset Allocation Funds to go out and find managers across the board, and they have the right to ask questions if management doesn’t keep up with their peers.”
Another strong group is Russell Life Point Funds, he says. “They’re structured, so their brokers can sell smaller amounts to people, and they go from very conservative to very aggressive.”
Ten Haagen adds he looks for consistent returns, “and also, if and when they’re going to rebalance. With a lot of the target-date funds, I don’t see rebalancing on an appropriate basis.”
Joseph Clemens, CFP, of Denver, Colo., founded Wisdom Wealth Strategies in 2010 and now has $15 million in AUM. Prior to starting his own firm, Clemens worked at Trilogy Financial Services, also in Denver.
Clemens looks closely at expense ratios and recommends investors use Vanguard funds if possible. He particularly likes Vanguard Index Trust 500 Fund [VFINX].
He also likes 361 Managed Futures Strategy Fund [AMFQX]. “I’m using it as a true alternative risk-management approach fund. You’re investing in managed futures. It’s not a traditional buy-and-hold fund,” and is not closely correlated with stocks or bonds, Clemens adds. For typical investors, he usually recommends low-cost indexed equity or bond funds.
CFP Robert Schmansky of Clear Financial Advisors, Bloomfield Hills, Mich., has been a financial planner for about 10 years and started his own firm in 2011, which now has about $10 million under management. He recommends funds offered by Dimensional Fund Advisors. “What DFA does so well,” Schmansky says, “is they own markets in a cost-conscious approach that recognizes risk and reward factors in relative asset classes, so small tends to outperform large and value tends to outperform growth.” Schmansky said DFA funds have relatively low fees and managers invest in their own funds.
“If a client says to me, this four-star or this five-star fund looks great, I say, ‘Great for what? Where does this fund fit in your portfolio?”