401(k) Advisors Adds Target Fund Performance to Scorecard

401(k) Advisors has enhanced its Scorecard System to measure the performance of asset allocation portfolios, known as lifestyle and lifecycle, or target date, funds.

The Scorecard System has been enhanced to address two issues in measuring the performance of asset allocation portfolios, according to a press announcement:

  • 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).

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“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.

Institutional Investors Ramping Up Soft Dollar Allocations

Institutional investors have revived their use of commission payments for “soft dollar″ allocations, as the Securities and Exchange Commission (SEC) seems to have backed off its push to dramatically overhaul the rules governing such payments, according to recent research by Greenwich Associates.

According to the firm, institutions are starting to return to paying third-party brokers for research and other services based on a growing belief that the SEC is not planning a dramatic overhaul of rules pertaining to Section 28(e). The SEC made the proposal to overhaul Section 28(e) in 2005, but has not yet implemented a rule change.

According to the firm, institutions had taken a more conservative stance with soft dollar arrangements as they waited for regulators to make a ruling. Industry-wide, soft dollar totals dropped 25% to $725 million in the 12-month period ending in February 2007 from $970 million the prior year, according to Greenwich Associates.

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As recently as 2004, more than 80% of institutions used soft dollars; by 2007 that proportion had fallen to 62%. In keeping with the general decline in usage, commissions directed for third-party products and services have dwindled as a proportion of overall U.S. equity commission payments, which totaled some $10.3 billion in the year ending February 2007, according to the announcement. Payments for third-party research products and services represented 9% of total commission payments in 2005 and 2006, but only 7% this year, according to Greenwich Associates.

However, use of such arrangements is expected to regain steam. When Greenwich Associates asked institutions to project their intended third-party products/services budgets for the coming year:

  • Institutions predict a bounce back to 10% of total commissions;
  • Investment managers predict that third-party allocations will jump to 13% in 2008;
  • Banks expect to increase allocations slightly from the current 20%;
  • 30% of institutions have set up client commission-sharing arrangements with brokers; and
  • 60% say they will have one in place within the next 12 months.

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