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Balanced funds, which invest in stocks and bonds, have been around for decades, but a new type of balanced fund has emerged in the last decade. Rather than using static allocations to stocks and bonds, these funds are dynamic. They change their allocations over time in order to take advantage of potential opportunities.
Morningstar created a tactical allocation category for these dynamic balanced funds, and this category now consists of 165 funds, including the FundX Conservative Upgrader Fund (RELAX). RELAX has a four-star overall rating among these 165 other tactical allocation funds as of December 31, 2013. (Morningstar’s overall rating is derived from a weighted average of RELAX’s three-, five- and ten-year risk-adjusted returns.)
RELAX was one of the very top-performers in this category for the 10-year period ending December 31, 2013. As of December 31, 2013, RELAX was ranked in the top 1% of 40 tactical allocation funds for the trailing 10 years, in the top 37% out of 96 funds for the five years, and 20% out of 165 funds for the trailing three years.
Changing Stock & Bond Allocations
Morningstar requires that funds in the tactical allocation category have history of making material allocation changes over the last three years. (See Morningstar’s category description below).
RELAX takes tactical allocation a step farther. In addition to changing RELAX’s stock and bond allocations over time, we also change RELAX’s allocations to different stock and bond styles, regions and industries. Rather than getting stuck in one area of the stock or bond market, we actively adapt RELAX’s portfolio in an attempt to respond to changing market conditions.
We believe having more investment options offers investors more opportunities. That’s why RELAX’s stock exposure isn’t limited to only U.S. funds; it can invest in foreign and global stock funds, as well as in growth funds, value funds, and large-, mid- and small- cap funds. And RELAX’s bond exposure isn’t limited to just one area of the bond market. It can tactically move among corporate and government bonds, short-term and intermediate-term bonds, and high yield and foreign bonds to take advantage of strength where we see it.
A Conservative Approach to Risk & Reward
RELAX is also designed to be a conservative fund so while we seek out opportunities in both stock and bond markets, we also manage RELAX with risk in mind. We invest RELAX’s stock exposure exclusively in diversified stock funds and total-return-oriented funds. We avoid more aggressive stock funds such as sector and single country funds. We also limit RELAX’s exposure to potentially riskier areas of the bond market, such as high-yield or foreign bonds.
Changing the Fund’s allocation to stocks and bonds is another way we attempt to manage changing markets. We may shift the fund’s stock and bond exposure into more defensive funds when it appears necessary to protect capital, or we can invest in more aggressive funds when we believe they offer the opportunity for growth.
In a rising interest rate environment, for example, we can reduce RELAX’s exposure to interest-rate sensitive bonds and move into short-term bonds, which may offer a relatively safe haven during volatile times in the bond market. Similarly in challenging stock markets, we can reduce RELAX’s overall allocation to stock funds and add exposure to total-return-oriented funds, which generally have exposure to bonds as well as stocks.
2013 offered an example of how RELAX attempts to offer investors growth with less volatility. RELAX participated in the strong growth from the U.S. stock market, with over 60% of its portfolio in stock funds, primarily leading U.S. large- and mid-cap funds and also less volatile total-return funds. RELAX also weathered a difficult year for the bond market. Its bond exposure was invested in corporate bonds, high-yield and strategic bond funds, which have less interest-rate risk than government bonds and Treasuries.
But we know that markets change and what worked in 2013 may not work in the coming years. If international markets start to outperform, we can increase RELAX’s stock exposure to foreign funds and ETFs. And if government bonds rebound, we can adapt RELAX’s bond positions to take advantage of new bond leadership.
Morningstar’s Tactical Allocation category: Tactical Allocation portfolios seek to provide capital appreciation and income by actively shifting allocations between asset classes. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. To qualify for the Tactical Allocation category, the fund must first meet the requirements to be considered in an allocation category. Next, the fund must historically demonstrate material shifts within the primary asset classes either through a gradual shift over three years or through a series of material shifts on a quarterly basis. The cumulative asset class exposure changes must exceed 10% over the measurement period.
About Morningstar Ratings: For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating TM (based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance, including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.) The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. FundX Conservative Upgrader Fund (RELAX) received a four star rating for the 3-year period among 165 funds, a three star rating for the 5-year period among 96 funds and a four star rating for the 10-year period among 40 Tactical Allocation funds. These ratings are as of December 31, 2013. (c) 2013 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
Morningstar Rankings represent a fund’s total-return percentile rank relative to all funds that have the same Morningstar Category. The highest percentile rank is 1 and the lowest is 100. It is based on Morningstar total return, which includes both income and capital gains or losses and is not adjusted for sales charges or redemption fees (RELAX does not have a sales charge or a redemption fee). Morningstar ranked RELAX in the top 20%, 37%, and 1% out of 165, 96 and 40 tactical allocation funds for the three-, five- and ten-year periods ending 12/31/2013, respectively.