Barclay’s has filed four new funds aimed a target risk:

Aggressive,

Growth,

Moderate

Conservative.

They aren’t available yet, but probably will be soon.

These funds will join a growing list of single solution, target date and target risk funds (also called “retirement date” and “life cycle” funds) available to US investors.

While we understand the desire for simplicity, we believe this broad concept approaches “one-size-fits-all” which is probably not appropriate, given the diversity of investor facts and circumstances.

Given the legal obligation of brokers and advisors to “know your customer” and to make “suitable” investment decisions or recommendations, we have some difficulty with the one-size-fits-all approach.

Too many funds is not good either, creating too much complexity. We like something in the middle — let’s call it “simplexity” — not too many, not too few.

That said, such funds may be adequate solutions for do-it-yourself investors who don’t, won’t or can’t spend enough time and effort on research and management of their own money. As advisors, we’d say they need advisory help — but if they don’t do that, target date or target risk funds may be what they need to use.

We’ve written before about out concerns, which generally apply to the prospective Barclay’s funds:

• Basic Suitability Issues in Portfolio Design (May 15, 2008)
• Life Cycle Asset Allocation (August 31, 2007).

Aside from those general concerns, we noticed some seemingly illogical allocations in the funds. They are not earth shaking problems, but we wonder why, if these funds are studied models for risk management, such seeming irregularities would exist.

Click the image to download a readable PDF breakdown of the portfolio allocations. The allocation data is taken from the filed prospectus for the funds. The allocation analysis is our own.

The two lines shaded in yellow are puzzling to us.

First, like most funds of their general type, they significantly overweight domestic stocks and underweight non-US stocks. We don’t accept that as appropriate for everybody, but if we put that aside, an extension of the logic would be to increase the non-US allocation as target risk increases. Yet for these funds, the non-US stock stock allocation is highest for the Conservative portfolio and decreases as the target risk increases. We don’t understand that decision.

Second, taking the general assumption that small-cap stocks are riskier than mid-cap or large-cap stocks, why do small-cap US stocks have the highest allocation for the Conservative portfolio, then decline significantly to the Moderate portfolio, then rise again to the Growth portfolio and then rise more to the Aggressive portfolio? We would expect a graded change, not a bumpy change.

These inconsistencies give us pause about the level of research or judgement that when into formulating the allocations for those funds.

The funds are merely fixed recipe packages of nine underlying funds, as is the case with similar offerings from other fund organizations.

We think do-it-yourself investors would be better served by studying these and other “target” funds to get ideas, but then to assemble their own portfolio of the underlying funds in a way that is understood by them and appropriate for them, instead to following the one-size-fits-all marketing approach these funds represent.

Richard Shaw
QVM Group LLC

[Securities mentioned in this article: IVV, IJH, IJR, EFA, EEM, AGG, SHV, TIP, ICF]