asset allocation models fund manager ero

Verifying Asset Allocation

asset allocation models fund manager ero

Trust, but verify asset allocation models.

As I have written previously, I am a purist.

I want to believe we can depend on Portfolio Managers to always tell investors exactly how they chose their holdings and adhered strictly to the process they market under. 

But we all know that is not the nature of our business all too often.


We each, while investing for clients, do our best in-depth analysis of the mutual funds we chose. But how do you really know what’s actually happening between quarters within a fund?

Do we have faith in a Mutual Fund’s success because the Portfolio Manager takes your call and he/she seems like a good, serious investor? 

Or because the fund has a billion dollars invested, so it must be good. 

Or Bloomberg and Morningstar really have good stats and the highest ranking for the fund.  

I am afraid the truth of how Portfolio Managers get performance will surprise and disappoint many.


What if I could show you a remarkably fast and easy way to be certain how the funds you are investing in are getting their returns?  The technology exists.

Some time ago, I was hired away by a very persuasive Portfolio Manager and CIO in the Midwest.  He was Portfolio Manager of the top-performing Large Cap Value mutual fund in America.  

CNBC featured him weekly on-air and Bloomberg loved him.  I was the new Portfolio Manager of the firm’s Small Cap Value fund.  Assets were pouring in.  

Everything seemed great.

Three months into the job, senior management walked into my office and announced they had just fired my boss, the big shot Large Cap Value manager.  

I was now in charge of his fund and they immediately wanted to know what I was going to do about it.  “About what?”, I questioned.

As it turned out, the Large Cap Value process espoused to the outside world was not what was going on inside this Large Cap fund.  

In fact, there was no process other than buying high beta stocks in a rising market. 

Additionally, he was doubling down on the losers multiple times.   

This manager doubled down 5 times on a hand full of disasters including Enron and WorldCom, just as they were going under.


In just a few months his fund’s performance underperformed peers and the Index by 2600 basis points (meaning if the market was up 5% this fund lost 21% in the same period.)  Ouch!

No chance your Bloomberg terminal would have alerted you to this coming pain. 

Heck, he was on CNBC once a week, how risky could it be? 

Morningstar had the fund highest rated vs. peers.  

When clients or consultants talked to the Portfolio Manager, do you think he told them what he was really doing?   

I don’t either.  Nobody knew, or cared, because past performance was good.

In another situation, years ago, a high-flying momentum mutual fund company grew rapidly to over sixty billion under management.  

Across the board, all of their mutual funds had outstanding performance.  

Bloomberg, Morningstar, and the Portfolio Managers never let on the performance was being boosted by systematically flipping IPOs in a hot market.  

The firm subsequently declined to one fifth the size when the IPO market changed directions it was discovered how this firm attained its outperformance.


What if there was an advanced analytical tool that accurately and quickly informed you about where your mutual funds were getting their returns? How valuable would that be?

Imagine how much more effective your carefully constructed asset allocation models would be if you could be confident your Large Cap Growth manager was actually getting returns in the Large Cap Growth space?  

Or your Small Cap Value fund was truly a Small Cap Value investor?  

Or that your ETF was actually attaining results through holdings in the space you expected without having to go through the tedious chore of reviewing every name in the portfolio?

Using a client’s Essential Return Objective (desired return) in developing an asset allocation strategy will achieve a clear and better direction.  

Any mutual fund performance should be measured against the desired return to determine the risk/return characteristics of the fund or ETF.  

Asset allocation strategies revolve around both asset and style mix policies.

It is extremely important to understand that no active manager or mutual fund is pure in a particular style.

If this is not recognized the asset allocation model created is not the one that will be delivered and the desired return is placed at risk.

When I managed a Small Cap Value mutual fund, the metrics of my fund always were well below the Small Cap Value Index.  

However, Morningstar had my fund listed as a Core fund, not based on the metrics but based on how the stocks performed.  

Be aware management within a fund can change without notice.  

One young Wealth Manager confidently told me he invested in funds with a 7 to 10-year time horizon.


Portfolio Managers with successful early track records often will hand management of the fund off to younger members of the firm while keeping the original manager’s name associated with the fund in order to convince investors nothing has changed.

Additionally, the early success of a fund’s performance may lead a Portfolio Manager to start hugging the benchmark in an effort to preserve annualized outperformance on into the future. 

Therefore, having an analytical tool delineating precisely where a mutual fund or ETF is achieving returns would be of significant value.  

Let us demonstrate this invaluable tool for you.

It is time to think differently about your business.  

Let us show you a better way with ERO.

Contact Us Now