INVESTING
We haven ’ t been able to find any performance reporting or trading software that generates a true asset mix based on underlying holdings as opposed to overall fund categorization .
The deviation of an actual portfolio mix from an agreed upon target could also prove costly in terms of legal liability . We believe this is potentially a major problem for firms that develop target allocations for clients across multiple U . S . equity asset classes and implement these recommendations using mutual funds and ETFs .
An Example
A common industry practice is to define the target size of a client ’ s allocation buckets and then fill them with appropriate securities . An advisor might prepare an investment policy statement or portfolio recommendations based on such guidelines . A portfolio targeting a 70 % allocation to U . S . large-cap stocks and a 30 % allocation to mid-cap equities might expect that it was meeting this allocation target with an allocation of 70 % in the SPDR S & P 500 ETF Trust and 30 % in the S & P MidCap 400 ETF .
Users of reporting and trading software ( like Orion ) would typically classify these as large and mid-cap funds , respectively , and indicate that this portfolio is spot on for the 70 / 30 target . However , according to Morningstar ’ s categorization of the underlying holdings , this two-fund portfolio would actually hold 57 % largecap names , 23 % mid-cap names and 20 %
small-cap equities , meaning the largecap and mid-cap companies are actually far below targeted levels , and small-cap stocks are wildly overweighted .
This misallocation problem can be further exacerbated by security selection . If an investor is filling an allocation bucket with funds sponsored by a firm like Dimensional Fund Advisors ( which tends to favor investment in smaller companies ), it is likely to find its portfolio even further below intended large and mid-cap targets .
The Goalposts Have Moved
Siblis Research data provides some historical context on how quickly things have changed . At the end of 2010 , the 500 biggest stocks made up 69 % of total U . S . market cap . By June 30 of last year , that number was 87 %. This means that the stocks outside the S & P 500 dropped in weight from 31 % to 13 % of the overall U . S . market in 13 and a half years . The playing field hasn ’ t shifted modestly — but in fact quite dramatically .
You can also see this problem in growth and value weightings , which have been even more volatile than market-cap categorizations over the last 22 years . According to BlackRock data ( derived from Morningstar data ), growth stocks were 23 % of the Russell 3000 on May 31 , 2002 ,
but had grown to 46 % of the index as of January 31 , 2024 .
Yet change has been rapid . By the end of 2024 , the growth portion was back down to 26.3 %. The shifting percentages were probably due to redefinitions of what qualified as growth and value . But regardless , that ’ s a lot of fluctuation for a broad-based index .
We haven ’ t been able to find any performance reporting or trading software that generates a true asset mix based on underlying holdings as opposed to overall fund categorization . We hope it ’ s out there . Some software allows users to spread the value of a security across multiple asset classes , which is helpful , but this is a tedious manual process that can ’ t be automatically updated . We have been told that spreading numerous fund investments across multiple asset classes is also likely to befuddle most portfolio rebalancing software .
The goalposts have moved . The portfolio management industry and its software providers have not caught up . Many investors , advisors and plan sponsors may not have even caught on . This is a potentially very costly problem that no one is talking about .
STEVEN ELLIS , CFA , is president and founder of Colorado Capital Management .
MARCH 2025 | FINANCIAL ADVISOR MAGAZINE | 41