Investment Ed- Core Holding

 You’ve heard about it at seminars or asset allocation discussions and may have wondered exactly what is a core investment holding. In the 1950s mutual funds provided a complete one fund does it all allocated investment plan. Funds were then off-shoots of professionally managed investment plans designed for the wealthy. At that time mutual funds were designed much like Target Date Retirement plans are today. MFS, Investment Company of America and Pioneer Fund were three such mutual funds. Over the years new funds morphed into specialization from their asset allocated roots but lately there has been the question of what fund should be an investor’s core holding.

Those that believe in asset allocation and Modern Portfolio Theory think of a core holding as the Sun and other assets as planets whirling around it. Investment allocation, MPT idealists preach, should be designed around the one core holding. Have too much risk and the core over-powers the portfolio during downturns. Not enough risk and the portfolio stagnates during upturns.

On the other side of the coin are professional money managers who don’t look at a core holding as something special because they are always buying and selling. Their core is whatever they want it to be.

Because of the name , ‘Core Holding’, some investors believe that the fund they choose should be the largest asset and be concentrated in one major sector such as Large Cap Growth or Large Cap Value. These same asset allocation idealists believe that investors should also own several smaller non-core funds like energy or technology. Their reasoning is to minimize downside risk and increase the total return. Investors  add specialty funds that they hope assist performance during up markets and stabilize on economic downturns.

Many investors have found that this core fund plus sector funds may not be that necessary as an investor can buy one fund and have as good a performance as someone who has created a portfolio using MPT.

Some financial planners insist a Core fund doesn’t have to be a large cap growth fund. An example of a non-traditional but truly workable core holding for a young child’s education fund could be a  small-cap, mid-cap or emerging markets fund. These are three asset sectors not traditional to being treated as a core holding but when you stop and think of the child’s age and when monies needed and additional dollars invested over time; they make perfect sense. Certainly not something a person in their 60s would use as their core. (It is an idea that is in direct contradiction to those parents that invest their kids education money into fixed low yield guaranteed accounts).

Traditionally an investor’s core holding should provide a wide market exposure. For example if it’s domestic stocks then it should emulate the S&P 500 index or a fund that invests in large cap multi-national or domestic companies that pay dividends. If an investor is looking at fixed income then the core fund should match a particular bond index such as the Barcap Aggregate Bond.

One way to check if your core has wide sector exposure is to check its R-squared number by reading the Morningstar report on the fund. A high R-square gives you an idea how close to the sector you’re looking to match is held by the fund. A 90 number is exactly 90% of the sector. You can use this test both for fixed and equity core holdings.

And when starting out don’t worry about core or non-core. The object is to make money in the most prudent method possible. Owning just one fund versus a baker’s dozen is a lot less complicated and easier to manage. And, as we found out during extreme economic stress MPT is about as effective making money during downturns as matching nickels with Knuckles Kowalski. 

 Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.