Summary

The Asset Allocation Rating informs investors of each fund’s level of allocation to cash (non-equities) as well as how that level compares to other equity mutual funds.

We assume investors in equity funds prefer those funds to be maximally invested in equities given that investors can much more cheaply invest in cash on their own. We do not believe that most investors want to pay the high fees associated with equity funds to invest in cash.

Definitions

1. Cash Allocation (Cash %): the percent of the net asset value of the fund that is attributed to Cash.
2. Strategic Cash: cash held because the fund manager believes cash is a more attractive investment than equities.
3. Frictional Cash: cash held for non-strategic purposes, such as to meet redemption requirements or to comply with investment policies[1].

Methodology

We assume that investors in non-leveraged equity mutual funds expect nearly 100% equity exposure because they can invest in cash directly and without fees on their own. Equity mutual funds that hold Strategic Cash effectively charge their investors equity-fund expenses for cash investing.

We allow fund companies to hold a reasonable amount of Frictional Cash. We define Frictional Cash as all cash less than 8% of NAV.

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