In fact, at the end of 2008 there was approximately $170 billion invested in balanced funds, according to a new report by Craig L. Israelsen, Ph.D. The report – titled – ” A Better Balanced Benchmark “, has been issued alongside a new benchmarking methodology and investable product called the 7Twelve Balanced Portfolio.
The report notes that the largest 10 balanced funds held nearly 80% of all the assets, and that the average 10-year performance of the 10 largest balanced funds from 1999-2008 was 3.74%, whereas the 7Twelve Balanced Portfolio generated a 10-year return of 6.97%.
Balanced funds meet the requirements of a qualified default investment alternative (QDIA) under the provisions of the 2006 Pension Protection Act (PPA), as do so-called target-date offerings. In addition to their built-in “glidepath” (i.e., dynamic asset allocation model) a common attribute of target date funds is broad diversification across many asset classes.
Balanced funds don’t have a glidepath because their allocation stays at or near the 60/40 level over time, notes Israelsen, an Associate Professor at Brigham Young University, and a principal at Target Date Analytics LLC , a firm that has developed indexes for the benchmarking and evaluation of target date/lifecycle funds. However, the report notes that US stocks and US bonds have been the “mainstay ingredients” in balanced funds, with the typical ratio being a 60% allocation to large US stocks and a 40% allocation to bonds.
“News flash…it’s not 1959 anymore,” the report notes, “today, there are multiple mainstream asset classes that should be considered when building a diversified balanced benchmark.”
As for the product name, it refers to "7" core asset classes with "Twelve" underlying subassets. "The 7Twelve Portfolio is constructed to generally follow the time-tested 60/40 guideline, but uses eight sub-assets (instead of one) to create an overall equity exposure of about 65% and 4 fixed income sub-assets (instead of one) to create a "bond" exposure of about 35%," notes the report.
All 12 sub-assets are index-based exchange traded funds and are all equally weighted (each representing 8.3% of the 7Twelve portfolio). The equal-weighting is maintained by annual rebalancing. The differences between the old school balanced benchmark and the new age balanced benchmark are depicted in "Old vs. New".
The report illustrates 12 asset classes (in seven core asset groups) that Israelsen says should be included in a 21st century balanced fund.
|7 Core Asset Groups||Twelve Specific Sub-Assets|
|US Equity||Large US equity
Mid US equity
Small US equity
|Non-US Equity||Non-US Developed equity
Non-US Emerging equity
|Real Estate||Global Real Estate|
|US Bonds||Aggregate US Bonds
Inflation-Protected US Bonds
|Non-US Bonds||International Bonds|
|Cash||US Money Market|
More information is available at http://www.7twelveportfolio.com/
|7welveTM Asset Allocation Model|
65% of the Portfolio Allocation in
Equity and Diversifying Assets
|Approximately 35% of the Portfolio Allocation in Bonds and Cash|
|US Equity||Non-US Equity||Real Estate||Resources||US Bonds||Non-US Bonds||Cash|
|Large Companies||Developed Markets||Global Real Estate||Natural Resources||US
|International Bonds||US Money Market|
|Medium-Sized Companies||Emerging Markets||Commodities||Inflation Protected Bonds|