As part of our investment philosophy, we develop a specific investment plan for each client. When we determine an allocation for each specific investment category, such as “US Small Value” or “Fixed Income” (cash, bonds, or CDs), we want the investment fund that we use, to remain pure to that classification.
With the mutual funds that we use to purchase stocks and the direct buying of fixed income investments, we have been able to accomplish that goal. Most mutual funds hold stocks across multiple asset classes, so they do not adhere to this discipline.
In an interesting article in today’s Wall Street Journal, according to an SEC filing, the world’s largest bond fund, Pimco Total Return, managed by Bill Gross, will be able to purchase as much as 10% of it’s assets in non fixed income investments, such as “preferred stock, convertible securities and other equity-related holdings, during mid-2011. Gross has an outstanding track record and his successful is undeniable, so I’m not going to question his motives.
However, this move re-inforces the importance of truly understanding what you are purchasing, when you buy a mutual fund or any investment. When we buy a “US” stock fund, we know that all of the companies in that fund are based in the US. With many other mutual funds, you may think you are buying a US fund, but upon further examination, find out that 20% of the companies are internationally based.
This is important if you want to adopt an investment strategy, an asset allocation plan, and then really be able to monitor and stick to it. If the fund that you buy wanders off and buys different things than you originally thought, than your actual asset allocation will not be what you intended. And that could be a problem.
In this case, we believe in purity.