Asset Allocation Funds Can Help Tame Volatility

Asset allocation funds are designed to attempt to reduce volatility by spreading assets around to several different types of investments, including a variety of equity securities, bonds and other fixed income securities.

Although diversification – with several asset groups feeding into the performance of the portfolio – does not eliminate risk, it may help reduce losses during stock market fluctuations. For instance, when the prices of small cap stocks are falling, U.S. blue chip stocks or international stocks within the portfolio may be moving up, along with bonds and other debt-related assets.

It is important to note that bonds can also be volatile, particularly in times when credit quality comes under pressure or when interest rates are changing. However, over longer terms, bonds have historically had lower volatility than stocks. The two asset classes can often be correlated in the opposite direction (when stocks go down, many bond sectors tend to rise), so while multi-asset portfolios could have lower returns over the long term than an all-equity index like the S&P 500®, a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks, they will usually have lower volatility, too, often resulting in a smoother ride for investors.

The chart below shows the returns and standard deviation of returns (volatility) over a recent period of five different Morningstar Target Risk Indexes that represent various levels of diversification (with a mix of assets that may include stocks, bonds and other types of investments).  The baseline is represented by the S&P 500, which shows a return level of 6.15% and a standard deviation of around 14.4%. The Morningstar Conservative Target Risk Index had a slightly lower return with dramatically less volatility, while the other indexes were somewhat more volatile than the Conservative Index, but had better returns. Three of five indexes had better returns and all five indexes had lower volatility than the S&P 500 Index.

Thrivent Mutual Funds offers four different asset allocation funds that range from moderately conservative to aggressive.  Although each of the Funds has an asset allocation target, the actual allocation can vary depending on the outlook and judgment of the Fund manager. The Funds are professionally and actively managed by a team of more than 100 investment professionals. 

For example, the Thrivent Moderately Aggressive Allocation Fund has a target asset allocation of 77% equity securities and 23% fixed income securities, but the actual allocation typically varies somewhat as the Fund manager makes adjustments in the holdings to react to changing market and economic conditions.

The Thrivent Moderately Aggressive Allocation Fund typically invests in more than a dozen different asset groups. The largest group has been large capitalization U.S. stocks, which typically accounts for about a third of the Fund’s total assets.  The Fund also invests in several other equity groups, including international, small cap, mid cap, and “opportunistic equity” (such as natural resources stocks or real estate investment trusts).   Bonds and other debt instruments make up the balance of portfolio assets, led by securitized debt, investment grade credit, short-term bonds and cash, and government bonds. Other bond instruments include high yield bonds, floating-rate bank loans and international debt.

The diversification of these asset allocation funds makes them less volatile than the performance of a single equity category, such as a fund that invest primarily in mid-cap stocks. Although the more conservative portfolios would tend to have lower potential returns over the long-term, their losses tend to be more modest and less frequent than the more aggressive investments.

Gauging Volatility and Risk

To gauge volatility, investors often use a metric known as “beta.” Beta is a statistical measure of the volatility, or market risk, of an investment compared to a benchmark. The lower the beta, the lower the volatility of the investment compared with the benchmark.

The S&P 500 composite index is considered a beta baseline, with a beta of 1.0. Anything over 1.0 is considered more volatile or risky than the market and anything under 1.0 is considered less volatile and less risky. For example, over a recent three-year period through December 31, 2017, the Thrivent Moderately Aggressive Allocation Fund – Class S had a beta of 0.79, which indicated that it was 21% less volatile than the S&P 500 during that period.

In addition to the Thrivent Moderately Aggressive Allocation Fund, Thrivent also manages three other asset allocation funds, giving investors with moderately conservative to aggressive risk tolerances the opportunity to choose a portfolio suited to their objectives and threshold for risk:

• Thrivent Moderately Conservative Allocation Fund. The target allocation for this fund is 63% fixed income securities and 37% equity securities. While this fund would probably trail the market and the other Thrivent asset allocation funds during a strong bull market, it would typically be the least volatile, with the lowest risk, during rocky periods in the market.  Over a recent three-year period through December 31, 2017, the Thrivent Moderately Conservative Allocation Fund – Class S has had the lowest beta of the group at 0.37, which indicates that it was 63% less volatile than the S&P 500.
• Thrivent Moderate Allocation Fund. The fund’s target allocation is 57% of assets in equity securities and 43% in  fixed income securities. Over the recent three-year period through December 31. 2017, the Thrivent Moderate Allocation Fund – Class S has had a beta of 0.58, which indicates that it was 42% less volatile than the S&P 500.
• Thrivent Aggressive Allocation Fund. This fund is geared to investors who want most of their assets in the stock market, but still prefer some diversification to offset the volatility of the market. The target allocation of the fund is 95% of assets in equity securities and the balance in fixed income securities. Over a recent three-year period through December 31, 2017, the Thrivent Aggressive Allocation Fund – Class S had the highest beta of the asset allocation fund group at 0.97, which indicated that it was 3% less volatile than the S&P 500.

Thrivent Mutual Funds has over 20 mutual funds, spanning most major asset classes, to help investors build diversified portfolios. 

Although asset allocation funds cannot shelter you entirely from the ups and downs of the market, they can lower your exposure to the stock market and help reduce the volatility of your own portfolio over the long-term.

Learn more about Thrivent Asset Allocation Funds.