Q:  What’s your investment philosophy?

A: This is one of five, balanced fundof- funds that we offer as part of the Russell LifePoints Target Portfolio Series. It’s our second largest fund with approximately $3 billion in assets under management. With an allocation of 80/20 equities to fixed income, it is geared toward investors either with a longer time horizon and/or with a slightly higher tolerance for risk.

Russell constructs almost all of its individual funds using long-term forecasts. We generally don’t have funds created for the short-term or market-timing as most of our clients are looking to fund retirement or other long-term financial goals. Our studies indicate that longterm strategies provide better rewards than short term ones.

What we do in the case of the Life- Points Funds is to combine individual Russell multi-manager funds in order to provide access to the combined performance of these funds. Each one has a different risk profile depending on the strategy chosen. This approach may provide greater possibility for both decreased risk and potential growth over the long term.

The Equity Growth Strategy Fund is made up of six underlying funds, including two non-US funds that represent about 23% of the overall fund.

One of the differences between our peers and us is that we consider real estate to be a separate asset class. In the optimization tools we use to assess these funds, real estate always comes up as a great diversifier for both the equity and bond funds. Many managers just put it into the US equity category.

The portfolio construction on the fund-of-fund level reflects Russell’s knowledge of the underlying investment managers. Although our process strives to be style-neutral, the fund ends up with tilts and biases in one direction or another due to the aggregate positioning from the underlying managers. There are times when managers of different styles will all go in the same direction for different reasons.

Q:  How would you handle such a convergence? Would you interfere to avoid the overlap?

A: We’d pretty much let it go. Actually, our capital markets research team has determined that when you have a growth manager and a value manager buying the same securities for different reasons and with different perspectives, then it’s usually a strong buy. There’s something going on that’s making that company attractive and we wouldn’t try to undo that.

There are times, however, when we would try to undo an individual fund bias that comes up. For example, in the non-US fund, all the managers viewed the Japanese banking sector negatively for a while. The portfolio manager at Russell was not comfortable with the strong underweight to that sector so our trading group created a plug reflecting that sector at the weight the manager requested.

At the fund-of-fund level, we generally don’t put plugs in, but we do constantly reassess the aggregate biases. We have strategic reviews once a year and we have ongoing oversight and research. During the strategic reviews, we take all the funds and run them through the programs we have. We have access to the same asset allocation tools and analysts that we use for our institutional clients. For the RIC mutual funds, we can leverage those same programs and resources to make sure that we have the best allocations amongst the underlying retail funds.

If there are new Russell products or asset classes on the market, we’ll analyze these or their market proxies if we want to explore adding a new type of investment. Then, together with the underlying asset class team, we’ll analyze whether or not we should create a fund for the fund-of-funds. Then, in discussions with the business units, they’ll decide if they might have an additional market for that type of investment. We work closely with both the underlying fund portfolio manager teams and with our capital markets research team that does asset liability and asset allocation studies.

Our research process, which focuses on researching the money managers themselves not individual stocks, is entirely bottom-up with our manager research analysts around the world kicking the tires and meeting almost everybody involved in the investment process. They provide ranks on the managers, such as hire, retain, or terminate. The Russell portfolio managers assess those rankings and then do their own analysis to determine the best mix of managers for the fund’s construction, and the best allocations amongst them. The goal is to create a fund that has exposure to all the different investment styles and sub-styles and then to highlight security selection.

Q:  What is the significance of the name ‘LifePoints’ for investors? Why is the fund family named LifePoints?

A: The LifePoints family of funds fall into the broad category of lifecycle or lifestyle funds. In general, to us, Life- Points means a lifestyle type of fund with the two different categories underneath. At different points in your life, you’ll want a certain allocation or risk profile. Under the LifePoints category, we have the Target Portfolio and Target Date Funds, the latter being the newer funds and both being rapidly growing product categories.

The Target Date Funds allow you to pick the date at which you expect to retire, and the respective fund automatically reallocates among the asset classes, starting more aggressively and getting more conservative as the time goes by. These funds are for folks who are not inclined to be that actively involved in their investment decisions. They want to make one decision and set it for the rest of their working career. At different points in time, the Target Date Funds will match up with the same allocation for the Target Portfolio LifePoints Funds but are geared for a different investor profile.

The Target Portfolio Funds are for investors more involved in their retirement decisions, so depending on the risk level and the time horizon they’re comfortable with, they’ll pick out the best LifePoints Target Portfolio Fund for their needs.

Q:  What are the major differences with your peers in the way you manage money, in addition to the real estate classification?

A: Another difference is that we don’t allow cash to be held in the fund both at the underlying fund and at the fund-of-funds level. This goes along with our philosophy and is related to the investment profile of our investors. They choose an allocation, so they want to be in that risk profile. Holding cash would dramatically change the risk profile and the return expectations.

We have managers in the underlying funds that believe that cash is part of their investment process, so they are allowed to hold it, but at the fund level we’ll take all that cash and sweep it into a program, usually of futures, that will replicate whatever the asset class is. We also hold no cash at the fund-of-fund level. So we remain fully invested all the time. This may hurt the funds in a down market, but over the long run, our research shows markets go up more than they go down. If you’re not in the market at the time when you get that initial turnaround, then you’re giving up a lot of return.