Kevin Miller, who oversees six mutual funds that invest in other funds, said he’s shifting his allocation to large-cap, value and dividend stocks from smaller-company shares as he expects the U.S. economy to slow.
Miller, the CEO of Systelligence and the portfolio manager overseeing the six E-Valuator mutual funds, said there will be a nine- to 12-month transition period to buy and sell the funds.
Despite the slant toward more defensive sectors, he expects health care and information technology to be “continually staying strong through all of this.”
“With domestic equity, we have captured a lot of gains through small- and mid-cap through the summer, primarily growth,” he said in an interview. “We are going to be diminishing our small-cap holdings and [move] into large-cap, more value-based, and, ultimately, heavy dividend payers.”
The six E-Valuator Funds were launched in 2012 originally as institutional trust funds. They were converted into open-ended mutual funds in May 2016. Systelligence is headquartered in Minneapolis and manages about $625 million in the six funds.
Each fund follows a risk-managed strategy (RMS) based on the level of risk acceptable to the investor. Each is a “fund of funds” that invests in equity and/or bond exchange traded funds (ETFs) and/or actively managed mutual funds. The underlying funds are selected by Systelligence’s E-Valuator software, which Miller developed. E-Valuator uses dozens of criteria, including performance, management-team experience, volatility and expenses to select fund managers. Daily oversight by human fund managers ensures that underperforming investments are replaced.
Miller said that tailoring fund strategies to clients’ goals and risk tolerance was a better approach than target-date funds, which have become popular in employer-sponsored retirement accounts. Target-date funds automatically change over time, with bond allocations rising and stock allocations falling as the investor nears retirement.
“When people retire, the problem is they have too much in fixed income or too much in equities,” he said. “You can look at a 2020 fund and see as much a 65% in stocks or 17%. So target-date funds miss the mark for the investor.”
A slowing economy and strategy shift
Miller said that unless President Trump is able to work with Democrats in Congress to get a major infrastructure bill passed, he expects “a significant slowdown, which could lead to recessionary environment in 2021.”
The U.S. economy grew 3.5% in the third quarter, as corporate profits in the 12 months through September climbed 10.3%, the fastest increase since 2012. Economists predict the U.S. will expand at a 2.7% pace in the fourth quarter.
This is leading Miller to shift the E-Valuator funds’ holdings more toward active strategies and away from passive ones. Actively managed funds charge more, but Miller said that the lower-cost institutional shares available to the E-Valuator funds help keep overall costs down. Also, higher total expenses of about 5 basis points can be outweighed by better performance.
When you invest in a fund of funds, you need to consider the fund’s expenses and those of the underlying ETFs or mutual funds it invests in. Looking at the E-Valuator Moderate RMS Fund
the annual expense ratio is 0.79% of assets. The fund’s largest holding as of Sept. 30 was the DFA U.S. Large Company Portfolio institutional shares
with annual expenses of only 0.08%. The second-largest holding was the DFA US Core Equity 1 institutional shares
with relatively low annual expenses of 0.19%.
He named several ETFs that he expected the E-Valuator funds to make use of:
- iShares North American Tech Software ETF
The ETF’s top holdings as of Nov. 30 were Oracle
and Microsoft
which each made up 9.4% of the portfolio.
- Vanguard Information Technology ETF
Top holdings: Apple
(19.1%) and Microsoft (13.8%).
- iShares U.S. Healthcare Providers ETF
Top holdings: United Health Group
(13.4%) and CVS Health
(9%).
- Vanguard Institutional Intermediate-Term Bond Fund
- JPMorgan Mortgage-Backed Securities Fund, R6
E-Valuator Funds
The first five funds have a defined allocation range for fixed-income, based on the fund’s “risk-managed strategy,” with the rest being allocated to equity investments.
• E-Valuator Very Conservative RMS Fund
Annual expenses are 0.93% of assets under management, according to Morningstar Direct. This fund is typically invested at least 85% in bonds or other fixed-income investments.
• E-Valuator Conservative RMS Fund
Expense ratio: 0.84%. Typical allocation: between 70% and 85% of assets in fixed-income.
• E-Valuator Moderate RMS Fund
Expense ratio: 0.79%. Typical allocation: 30% to 50% fixed-income.
• E-Valuator Growth RMS Fund
Expense ratio: 0.80%. Typical allocation: 15% to 30% fixed-income.
• E-Valuator Aggressive Growth RMS Fund
Expense ratio: 0.83%. Typical allocation: 1% to 15% fixed-income.
• E-Valuator Tactically Managed RMS Fund
This fund has much higher annual expenses of 1.40% of assets, and has a fluctuating strategy, with the money invested with “five to seven tactical managers that can go wherever they want.”
The largest of the six funds is the E-Valuator Aggressive Growth RMS Fund, with $231 million in assets under management; the smallest is the E-Valutor Tactically Managed RMS Fund, with $13 million.
Also see: How to be a better investor: Apply your shopping skills when buying stocks
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