Boyda said that investors can also use factors to help balance risks across asset classes and manager types. Vogt, on the other hand, discussed diversification in terms of purpose and function.
“The way we look at a lineup of funds, we have objective categories like capital appreciation, income and balance,” said Vogt. “The portfolio managers in those funds have different levels of valuation sensitivity or requirements for generating income. As long as each fund’s management are doing their job consistently over long periods of time, you’ll have gotten a spectrum of funds that you can then use.”
Lester advocated giving fund managers the flexibility to find opportunities and adjust allocations across factors, geographies, asset classes and styles.
Allocation strategies that take tactical decisions out of the hands of advisors and investors and place them with portfolio managers or fund managers are proof that diversification still works, said Lester, because investors are most likely to stay the course.
“Our brains are not wired to do this well,” said Lester. “We all rely on lots of experience and models to do this well. Someone is the pessimist and someone is the optimist on our team and they argue with each other. The wiring problem is why this is so hard. People throw in the towel at the wrong moment.”
As proof, Lester referred to the recently released 2018 Morningstar Mind the Gap Study, which showed that investors in multi-asset balanced and target-date strategies have outperformed their funds due to the benefits of dollar-cost averaging in rising markets.
The relative success of balanced-fund investors should serve as a clue to where an advisor’s true value lies, said Boyda.
“We’ve lost the secret of what people really want to cling to—that is, ‘Help me through the messy ups and downs of the market. Be my counselor,’” said Boyda. “These target-date funds have done a wonderful job of helping investors through the messy bits.”