PLANSPONSOR - February/March 2019 - 57

in its asset mix and dynamic in its allocations.
By gaining degrees of investment
freedom, skilled investors might deliver
better performance when the world's
markets move in different directions.
" Such a fund could provide returns
less correlated with other assets, and a
more robust portfolio, " says O'Meara.
" That said, it's very difficult for a
manager to outperform consistently. If
[the manager] accesses markets through
funds that have underlying tilts to them,
this can be a complicated and expensive
process. And when markets are all
moving in the same direction, fees for
active management can be hard to justify. "
The accompanying table compares the
recent shortfall of the median manager
in the Morningstar tactical allocation and
world allocation categories vs. U.S.-based
market benchmarks.
" We've looked at any combination of
multi-asset portfolios as part of a genre of
new ideas that came up about five years
ago, " says Ed McIlveen, director of research
at Francis Investment Counsel, a firm of
DC plan advisers in the Milwaukee suburb
of Brookfield and a PLANSPONSOR
Retirement Plan Adviser of the Year. He
lists fundamental investing, 120/20 strategies,
modern alternatives and dynamic
multi-asset portfolios employing tactical
asset-allocation strategies.
" As a plan adviser, I find it hard to get
comfortable with these kinds of products, "
he adds. " Large shifts in asset allocation
are hard to evaluate for manager skill and
effectiveness over the long term. Tactical
allocation is OK in our view as long as it is
on the margin and there's a strategy that
underlies the general approach. "
" These products haven't found
much adoption in the DC world in the
U.S., although they have in the U.K., "
Anderson says. " They're young, and the
universe isn't terribly deep. They also
tend to be more expensive than a static
balanced fund or a target-date fund, so
being dynamic comes at a cost. "
The volatility of markets in 2018
provided an informative stress test for
Multi-Asset Fund Returns, by Category
And Market Benchmarks All periods ended December 31, 2018
Median Annualized Returns
Tactical allocation funds
World allocation funds
Vs.
Standard & Poor's 500
60% S&P 500/40% Bloomberg Barclays
U.S. Aggregate Bond
Sources: Morningstar and eVestment, respectively
multi-asset funds. The median manager
in Callan's multi-asset universe lost 5.3%
for the year, vs. a 4.4% drop for the S&P
500. " Unfortunately, diversification did
not help much in 2018, " comments Kevin
Machiz, a vice president at Callan in
San Francisco. " Concentration in equity
would have been great in the second and
third quarters, but losses in the fourth
quarter would have more than offset the
earlier gains. The best returns would
have come from simply hiding out from
risk, but that's difficult for a strategy
trying to generate long-term returns. "
He adds, " Another potential hurdle
for DC plan adoption is that when
managers have so much latitude to allocate
their portfolios, the performance can
be disparate, which makes for challenging
communications with plan sponsors and,
more critically, the participants. "
One dynamic fund that stands out
among peers is the J.P. Morgan Global
Allocation fund, managed by Jeffrey
Geller, chief investment officer (CIO) of
multi-asset solutions, in New York. For the
five years ended this past December, the
R6 share class returned 3.92% annually,
vs. 3.30% for a 60/40 global benchmark,
and earned the fifth percentile rank in
Morningstar's global allocation category.
" We've operated with very broad
ranges-the equity risk has been as
high as 79% and as low as 30%, and the
high-yield allocation up to 35% and down
to 3.5%, where it is today, " Geller says.
Through these allocation shifts-and
managing risk with government bonds
and options-he aims to keep the risk
of the overall strategy equal to that of a
classic 60/40 portfolio.
" The markets are moving into a
more volatile period, where investors are
re-evaluating what they want to pay for
growth late in the economic cycle, " Geller
explains. " People want return, but they
want to get there through the volatile
environment with a smoother ride. "
Introducing new investment options
to DC sponsors has been a tough endeavor
over the last several years, O'Meara says.
" One trade has worked-being long equities,
and U.S. equities specifically. But we
don't think that is something investors will
be able to replicate over the next 10 years.
Going forward, more dynamic funds may
show greater potential. " -John Keefe
KEY POINTS
* Multi-asset funds provide a
middle ground for investors
who aim for returns higher than
dedicated bond funds but do not
want all the risk of equities.
* Managers of multi-asset funds
have more flexibility in their
investment choices, but adoption
rates in the U.S. have been slow.
1 Year
3 Years
-7.68% 3.25%
5 Years
1.26%
-8.10% 3.60% 1.56%
-4.38% 9.26% 8.49%
-2.35%
6.50% 6.24%
PLANSPONSOR.com February - March 2019 57
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PLANSPONSOR - February/March 2019

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