Few, if any, actions you take as a mutual fund investor have as much of an impact on the expected return and volatility of your portfolio as how you split it among classes of assets and how you factor potential income tax bills into your investment decisions.
How you allocate your assets among stock, bond and money market funds influences the likelihood that your portfolio will achieve your targeted long-term rate of return without excessive volatility.
How well you remember the potential tax consequences of income dividends, capital gains distributions and share redemptions influences the net rate of return on your taxable fund investments.
It may be a bit of a challenge to do these things appropriately, but they can be done with a little effort: by getting a sense of how someone in your situation might allocate his or her assets and by weighing what and when you buy, what and when you redeem. If, however, you want others to relieve you of some of these chores, you may be interested to know about new funds that have been formed by two top no-load fund families, T. Rowe Price and Vanguard.
Price has introduced three “Personal Strategy” asset allocation funds that provide a choice of asset blends, based on the emphasis on appreciation and income, and that differ in expected return and risk: Income Fund, 40 percent stocks, 40 percent bonds and 20 percent money market securities; Balanced, 60-30-10; and Growth, 80-20-0.
Price was motivated by response to its Spectrum Growth and Income Funds, introduced in June 1990, which are primarily invested in other Price equity and bond funds, respectively.
The firm found that while some investors, aiming at appropriate asset allocation, were investing in the two in different proportions, others may have been uncertain what to do and split their money 50-50 between them.
For the new funds, the asset allocation decisions will be made by a committee of Price portfolio managers, chaired by Peter Van Dyke, the Spectrum Funds’ president. When it’s desirable, they can raise or lower the allocations to any class in any of the three by 10 percent.
The Income Fund is designed for investors who seek income, some capital growth and reduced volatility; the Balanced Fund, for those who want more appreciation but still “significant” income; and the Growth Fund, for investors who primarily want appreciation.
The equity portions will be invested in growth, value, small company and international stocks, chosen by four of the managers. For the bond portion, Van Dyke and other managers will choose high-grade, intermediate-term domestic and foreign issues and up to 15 to 25 percent (depending on the fund) “junk” bonds.
As in the cases of most other mutual funds, the possible tax consequences of securities sales and other investment decisions will be subordinated to the funds’ total return and volatility targets.
Minimizing the impact of taxes on returns is the goal of Vanguard’s new funds.
Given Vanguard’s leadership as a sponsor of funds that are run to match the performance of various securities price indexes, it’s not surprising that they are oriented to indexes, too-and, thus, can hold out the promise of operating expenses as low as 0.20 percent.
To discourage traders, they require minimum initial investments of $10,000 and will impose fees for redemptions within five years.
Designed for investors who want appreciation and “moderate” or “nominal” income, the Growth and Income and Capital Appreciation Portfolios will invest only in stocks. Growth and Income will own virtually all 500 in the Standard & Poor’s 500 Index but in different proportions from the index; Capital Appreciation, a sampling of large and medium-size companies’ stocks from the Russell 1000 Index.
The Balanced Portfolio, which will seek growth and “reasonable” income, will be 45-50 percent in stocks chosen from the Russell 1000 and 50-55 percent in intermediate-term tax-exempt securities.
Aside from investment in municipal bonds, the tax strategies will include deferring the realization of capital gains; selecting securities with the highest cost basis when selling; realizing capital losses when prudent; and emphasizing stocks with low yields.
