As active asset allocators, the Avatar team constantly checks to make sure their funds are still on track and that their valuation metrics still make sense. "We don't swing around portfolios radically," Theodore says. "There are bands of asset allocation changes that we stay within. They're not very wide, but they can make a difference."

One of the things that can impact valuations is liquidity caused by monetary policy ("Don't fight the Fed") and the economic system, which generates liquidity as a normal part of the business cycle." Liquidity, of course, can juice the markets.

Avatar also seeks confirmation through market momentum. ("Don't fight the tape.") "We want to make sure we're not fighting the markets, and insisting we're right when the markets are punishing us," Theodore says. "We're fairly quick to recognize our mistakes and cut our losses, and we let our profits run."

In the 401(k) space, Avatar's most conservative offering, the capital preservation fund, held up well in 2008, with a loss of 1.58% versus an average loss of nearly 19% that year in the Morningstar universe of conservative allocation U.S. open-end funds. When the markets rebounded in 2009, Avatar's capital preservation fund gained 11.24% versus the average 20.29% gain in the comparable Morningstar category. But Avatar notes the fund's combined two-year performance still beat the Morningstar category by 5.82% because of the downside protection in 2008.

At the other extreme is Avatar's all-equity aggressive growth fund and its nearly 38% drop in 2008, which mirrored the 38% drop in the S&P 500. In 2009, Avatar's fund gained almost 30% versus the S&P's 23% rise that year.

"We don't believe in market timing, but we do try to lean the portfolio in the direction we think it's going and be comfortable with modest outperformance of the benchmark over intermediate periods," Theodore says. "And if you string that together over long time periods, you get very good performance and extremely good risk-reward performance."

Avatar has a reputation as a conservative shop, but that might be misconstrued. "Avatar has taken the indexing concept and overlaid a tactical allocation approach to it, so it can be viewed as less volatile, which can be translated to conservative," says Randy Kamps, an RIA in Traverse City, Mich. "My take is they have the most rational approach I've come across for my clients."

Kamps uses other investment managers for his 401(k) clients, but he says Avatar is his predominant choice. "My experience with Avatar has been very good," he says. "Their managers utilize the most transparent and efficient investments possible."

Glide Path
Carlson says Avatar is involved with more than 400 401(k) plans, and on average is adding five to ten plans a month of various sizes. He adds the company supports the plan consultant or advisor serving the plan with plan sponsor meetings or conference calls.

Sue Thompson, managing director at iShares, gives the firm credit for providing institutional quality management at prices normally only available to big companies. "Typically, the smaller the company trying to launch a 401(k) program, the more expensive it is," she says. "Now, even small companies can get a 401(k) plan at reasonable cost, which goes to the bottom line of a participant's account."