Mainstream investors who want access to institutional investing strategies like those used by large university endowments and pension funds now have a way of getting it.
Rydex Investments recently launched Essential Portfolios, three products that invest in a combination of the company's mutual funds to get exposure to everything from stocks and bonds to alternative assets --such as commodities and currencies -- and hedge fund-like strategies.
These funds-of-funds -- or mutual funds that invest in other mutual funds -- focus largely on risk and are designed to provide retail investors with a higher level of portfolio diversification. The idea is to decrease vulnerability in bear and sideways markets, though that also means returns will be more muted in an up market.
"If the market booms, they won't do as well from a relative standpoint, but in a sideways or downward market, these products are likely to outperform," says Phil Fragasso, a senior vice president of marketing at Rydex.
By using alternative assets and strategies to construct the portfolios, Rydex is taking a cue from university endowments -- think Harvard and Yale, for instance -- which have enjoyed superior performance over the past decade, due largely to their creative use of a wide variety of asset classes and investment methods.
For fiscal 2006, Harvard, the nation's wealthiest university, saw its endowment grow 16.7%, to nearly $30 billion. Meanwhile, Yale's endowment, which is second in line after Harvard's, actually performed better, rising 30% to $18 billion, slightly topping its growth the previous year.
"If you look at the 10 largest university endowments, they all outperform the typical portfolio," says Fragasso, who adds that "typical university endowments look nothing at all like a traditional retail investor's portfolio."
Endowments, he adds, tend to focus on risk and a longer-term horizon, while only a "tiny minority of retail investors think about risk."
That point can be illustrated by looking at what happened during the market bubble of 2000. Investors were getting 25% returns annually, but they weren't focused on the volatility of their portfolio and on the fact that the stocks they were investing in were highly risky, says Fragasso.
"People think about returns
firstand risk as a distant second, if they think about it at all," he adds.
That's where the Rydex Essential Portfolios come in.
There are three funds to choose from: conservative, moderate and aggressive. The expectation is that more risk-tolerant investors will start out with the aggressive portfolio, and as their tolerance for risk declines, move to the moderate mix and, finally, the conservative portfolio.
In the aggressive portfolio, more than 68% of the asset allocation goes toward the following funds:
Multi-Cap Core Equity,
Absolute Return Strategies (the latter of which seeks to achieve positive returns in both up and down markets). (All tickers are for H-Class shares.)
The rest of the aggressive mix is split between the
Dynamic S&P 500,
Government Long Bond Advantage,
Russell 2000® Advantage,
Sector Rotation and
Hedged Equity funds.
In the moderate fund, the holdings shift a bit; for instance, the allocation to Absolute Return Strategies increases, the Commodities fund decreases as a percentage of the portfolio, and two funds are added,
Nova. Hedged Equity drops from the portfolio, as do the Russell 2000 Advantage and a couple of other funds.
By the time you hit the conservative fund, the Multi-Cap Core Equity, Absolute Return Strategies and Government Long Bond Advantage funds dominate, along with the Money Market fund, which comes in with a 20% allocation. The remaining 20% of the conservative group is divided between the Europe Advantage, Commodities, Sector Rotation, Hedged Equities -- which returns to the portfolio -- and
Small-Cap Value funds, the latter of which is introduced for the first time.
pie charts illustrate the different allocations in each fund, as of June 30.
The Rydex funds are meant to target both do-it-yourself investors and financial advisors.
According to Fragasso, they provide individual investors with a well-diversified portfolio, but also give advisors the opportunity to offer something to their clients beyond capital accumulation or preservation. In addition, Rydex is aiming to get the products onto major 401(k) platforms, says Fragasso.
So how much does this level of diversification and risk adjustment cost? Perhaps not as much as you think.
Most funds-of-funds charge an overlay fee -- basically an added expense for the special structure -- in addition to the fees levied by each underlying fund. Rydex does not charge an overlay fee for these funds, so the expenses amount to the weighted average expense of all the included funds, or about 1.4% for the no-load H-Class shares and 0.75% for some of the loaded funds, Fragasso says.
"We think this is a reasonably inexpensive way to get institutional-like exposure," says Fragasso, who adds that the strategies and asset classes used in the portfolios would typically be available though products like hedge funds, which usually charge 2% and take 20% of the profits.
It's too early to tell how the funds are faring, but Fragasso says that "feedback has been overwhelmingly positive."
He declined to provide data on the asset flows into the funds, but says, "We are happy where we are in assets for a brand-new product ... we are on pace for sales goals for the year and momentum is picking up."