Asset Classes the Dow Component

Asset Classes

The Dow component that I have chosen is Microsoft and the mutual fund is Fidelity Asset Manager 20%. This fund is considered to be a conservative allocation fund, but its mandate allows it to draw upon most equity classes.

Over time, the Fidelity Asset Manager 20% expects to maintain an asset composition of 20% equity, 50% debt and 30% in short-term and money market. The present composition of this fund is 13.99% is domestic equities; 7.39% in international equities; 53.80% in debt; and 24.82% in money market. These ratios have changed somewhat in the past six months. The fund has reduced its holding of debt from 58.36%. Domestic equities have decreased from 16.57% and international equities have increased from 4.27%. These changes most likely reflect a renewed optimism in global economic growth, but a diminished optimism and profit-taking in U.S. equities. The proportion of international equities has increased at the expense of U.S. equities. The position of cash has also increased, making the fund more conservative. That said, this figure still falls short of the 30% that the fund intends to hold in cash and money market.

Microsoft has a high proportion of its assets held in cash. An estimated $31.4 billion sits in the company's war chest, from a total asset pool of $77.8 billion. Microsoft has difficulty finding viable investments for all of its money, although as company policy is prefers to keep some cash as a cushion against competition, economic downswings and for new acquisition activity. In terms of capital structure, Microsoft is oriented towards equity. The company's debt to equity ratio is just 0.96 and very little of that figure is represented by long-term debt.

While the mutual fund is oriented towards debt and international equities, it holds a smaller cash position on the basis of percentage of assets than does Microsoft, which is highly unusual. The fund, which is characterized as conservative, has taken a more aggressive stand with respect to its asset allocation. This may reflect increases in equity values in the past six months, however. Where the mutual fund prefers to steer clear of cash and money market instruments in this low rate environment, Microsoft seemingly cannot find good investments for its money. In a low interest rate environment, it seems strange that Microsoft would hold so much of its portfolio in cash rather than seek out equity investments. It is to be believed that strategic considerations are the reason for Microsoft's emphasis on cash.

Over the past three years, the Fidelity Asset Manager 20% has performed almost as well as Microsoft and better than the Dow Jones Industrial Average. Microsoft has recorded a slight gain over the past three years, but has demonstrated substantial volatility. The company rose dramatically in 2007, fell sharply in 2008 and has recovered strongly since. The mutual fund as had by far the most stable performance. The fund is slightly down over the three-year period and has been down for most of that time. However, for most of 2009 the mutual fund was performing well above Microsoft and the Dow. The Dow is the poorest performer of the three, demonstrating surprising volatility during that period. The Dow is down more than 10% in the past three years.

This performance must also be measured against the expected performance in order to conduct a proper evaluation. Microsoft's outperformance of the market, for example, represents a strong performance relative to the market. The company's stock has a beta of 0.97, meaning that the expectation is that Microsoft will trade almost in line with the Dow. That it has significantly outperformed the Dow means that the performance of Microsoft's stock has exceeded expectations.

The mutual fund has a beta of 0.77. This means that its relative lack of volatility is expected. The fund has a high proportion of debt securities and cash. With just 20% equity, a beta of 0.77 actually seems high. The fund's performance is superior to that of the Dow, however. Given the Dow's performance and the fund's beta, a decline in the range of 7% would be expected and the fund has outperformed that.