Asset allocation funds: strategies and composition

Finance

A) I have chosen the Templeton Global Total Return A, which is a high-performing fund that offers diversification and a global outlook. It is comprised of world bonds and cash. The fund's income is primarily generated from its load, which in this case is 4.25%. This is a front load. The other main cost in a mutual fund is the MER, or management expense ratio (Investopedia, 2014). For this fund, the MER is 1% (Morningstar, 2014).

b) The operating expenses are pretty much the same as for any fund. The fund needs managers, who do research, make investment decisions and administer the fund. The fund is also going to be subject to transaction costs -- while Templeton is big enough to minimize these costs, there are always transaction costs when going into the market.

c) I would say that these fees are fairly reasonable. A bond fund requires less research than an equity fund, so a lower-than-average MER is expected. The fund has a turnover of 25% annually, so there is some trading to adjust things like the duration of the fund in order to maximize performance. The load seems fairly high, but this is a bond fund with low interest rate sensitivity. Nevertheless, most investors are probably going to buy and hold with a fund like this, because it makes up the bond portion of a larger portfolio. Also, the number of different interest rates around the world to which the fund is sensitive means that more research is required that would be the case for a domestic bond fund. All in all, which I have some concerns about the high front end load, I would say that the low MER makes up for that a bit and this fund is fair value.

Q2. A.The SEC provides a guide to asset allocation, noting that there are several factors that influence the asset allocation. These include risk tolerance and time horizon. The site provides a link to the following: http://www.ipers.org/calcs/AssetAllocator.html

This is an online asset allocation calculator. It tells me that I should have an asset allocation of 89% stocks, 5% bonds and 6% cash. I more or less agree with this asset allocation, for a couple of reasons. The first is that it does recommend a high amount of equity. This I agree with -- I was thinking 100% equity would be good for me. I can understand having some of this in cash as well, because if I put a little bit of money aside each month, then that money will sit in cash until I invest it. The one thing that I am less sold on is the merits of having any bonds at all. I told the calculator that I have very little savings, and I'm not sure what it recommended for bonds can even be bought -- even my mutual fund has a $1,000 minimum purchase. So I'm not sure the logic of having any bonds at this point.

B. I would say that this allocation is about right. I am taking the hyperaggressive approach because of my age and the fact that this money is going to be such a small portion of my lifetime savings, but the reality is that the Iowa allocator also delivered a very aggressive result.