According to the announcement, the Scorecard System has been enhanced to address two issues in measuring the performance of asset allocation portfolios:
- Asset allocation funds are difficult to benchmark because they invest in a wide number of asset classes and the allocations vary over time. To address this, the Scorecard System uses customized benchmarks to measure each fund, identifying the “best fitting” benchmark, weighted across a selection of industry accepted third-party indexes. These custom benchmarks predominately reflect the proportionate equity and fixed income weightings for a particular fund and the weightings are adjusted every quarter as the fund’s allocation changes over time.
- 401(k) Advisors redefined the peer groups for asset allocation funds based on their variation from expected returns (standard deviation), rather than simply measure performance against traditional industry groups. Measuring performance risk instead of performance against industry peers resolves an ambiguity in evaluating these funds effectively and better identifies the funds’ risk profiles, according to 401(k) Advisors. The lack of a single investment style or allocation range in these portfolios suggests that standard deviation may be the most effective way to employ peer analysis to measure these funds.
The funds are scored on a scale of 0-10, similar to the existing 401(k) Advisors Scorecard Methodology applied to core asset classes. The initial scoring of over 80 asset allocation funds showed that only 40% ranked favorably (7 or higher), and 20% of the remaining 60% were rated as poor (4 or lower).
“The enhancements to our Scorecard System provide clients and their employees with exceptional opportunities for long-term competitive investment returns, in a framework that better identifies and manages risk,” said Jeff Elvander, Chief Investment Strategist at 401(k) Advisors, in the announcement.
More information is at www.401kadvisors.com .