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Asset sector selection drives investment returns

Published: Tuesday, Dec. 11 2012 1:06 a.m. MST

Whether as an individual investor selecting mutual funds or ETFs for a personal investment portfolio or as a part of a 401(k) plan, or as an institutional investor making direct investments or selecting specific external investment managers, the broad array of investment options can be daunting.

As an example, industry reports suggest there are more than 15,000 mutual funds in the United States

While evaluating specific investment managers or mutual fund families often garners a majority of the time and effort many investors allocate to the investment process, the more significant contributor to longer-term investment performance will most likely be the allocation to the various asset sectors.

Depending on time frames observed and measurement techniques employed, asset allocation often contributes up to 90 percent of a portfolio's total return.

Evaluating and selecting a specific mutual fund can be a challenging task. Mutual funds may have an individual lead portfolio manager or may have a team that is responsible for managing a fund. Turnover at the portfolio manager level is sometimes less transparent to the investors in a mutual fund.

For many asset sectors, very specific investment skills are needed to compete effectively. It is not unusual for investment professionals to spend all or most of their careers focused on a relatively narrow asset sector. For example, in the fixed income universe, unique skill sets are needed to effectively manage portfolios of bank loans or portfolios of debt private placements or portfolios of high-yield bonds.

While common credit analysis fundamentals underlie these various sectors within the fixed-income universe, deal execution, transaction structuring, transparency of company financial information, sector trading, asset liquidity and many other factors critical to determining the ultimate success of investing in these sectors exist.

If investment exposure is desired to sectors such as these, finding an experienced and successful portfolio team is paramount.

As these investment markets are highly competitive, those who invest without the proper knowledge and experience will most likely underperform compared to the more seasoned sector participant.

Given the challenge of identifying an investment manager with a high probability of achieving success in the future economic environments, most investors should focus their initial investment efforts on the allocation of their assets to the major asset sectors.

Once that allocation strategy is developed and implemented, manager selection can be pursued where desired.

Assuming roughly 90 percent of investment return will come from overall asset allocation, it is not unreasonable to allocate as much as 90 percent of an investor's efforts in developing and implementing the allocation strategy.

Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.

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