Advisors, Due Diligence Crucial To Asset Allocation

February 09, 2017

Advisor usage of ETFs to support asset allocation needs has continued to grow, according to a TD Ameritrade survey. Such adoption is consistent with the strong inflows CFRA saw in 2016 and the $40 billion of new money in January as well as from a recent discussion with Brett Mossman, head of BlackRock Portfolio Solutions.

Mossman’s team reviewed more than 7,500 wealth management portfolios in 2016, and he explained to CFRA there has been a greater usage of ETFs in portfolios in response to regulatory complexity. Mossman believes this is at the expense of both mutual fund holdings and individual securities, driven by a desire to reduce costs as well as to reduce the regulatory risk of advisors managing stock portfolios for clients.

Quest For Performance Raises Risks

Yet according to BlackRock, a financial advisor’s equity sleeves are taking on more risk, in part because equity mutual fund managers are taking on higher risk—reaching for greater opportunities and earnings growth—in their quest for performance. Mossman thinks this has led to unintended results like style drift and market cap creep that produce either more or different types of risk than was intended.

An actively managed equity mutual fund will be grouped into a style or peer group with similar funds from a third party based on the underlying holdings. But it is up to the advisor or investor to keep track of whether the peer group has shifted in recent years because fund management has discretion to hold on to winning stocks or seek out a range of ideas.

For example, Centre American Select Equity Fund (DHAMX) has shifted in the last five years from Lipper’s large-cap value style (2012-2014) to large-cap core (2015) to large-cap growth (2016). The fund holds approximately 50 stocks driven by its “economic value added” investment philosophy. The fund’s heaviest weightings were recently in Amazon and Facebook), consistent with many large-cap growth fund peers.

In ranking approximately 23,000 mutual funds based on a combination of relative performance, risk and cost metrics, CFRA uses Lipper’s investment styles and our proprietary holdings analysis.


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