Another Wall Street Practise Questioned

THE tide for financial reform now engulfing Wall Street and Congress in the wake of the Oct. 13 stock market decline is triggering an examination of widespread trading practices, including computerized ``asset allocation.'' Concerns about asset allocation have come from experts as diverse as Congressman Edward J. Markey (D) of Massachusetts, who is spearheading the legislative drive for market reform, and John Phelan, chairman of the New York Stock Exchange. Asset allocation is the use of computer-based economic models to divide investment portfolios - ``assets'' - into different market categories. These include stocks, bonds, and cash holdings, such as money market accounts.

``As a strategy, the concept is hardly new,'' says Jack Barbanel, president of First Global Asset Management, Inc., based in Princeton, N.J.

Consciously or not, most individuals engage in asset allocation when they divide up their pay checks, putting some money into one category, such as paying a bill, some into another, such as savings, notes Mr. Barbanel. ``The underlying concept of money management is asset allocation, the ability to move from underperforming investments to performing investments.''

Computerized asset allocation models vary widely. Morgan Stanley and Company, for example, uses not just a domestic but an international model. First Global, which has both institutional and individual accounts, engages in what outsiders might call ``strategic asset allocation'' - employing long-range investment plans based on the direction of such variables as interest rates and the relationship of the dollar to overseas currencies, as well as a consideration of the underlying value of stocks.

Currently, First Global's allocation model commits 30 percent of its portfolio to stocks, 40 percent to bonds, 15 percent to cash, and 15 percent to the futures market.

The problem with asset allocation stems from the sudden redirection of investments, often involving millions of dollars, critics say. Various strategies are involved, such as ``tactical asset allocation,'' which requires the quick shifting of funds from one investment category to another, as well as ``market timing,'' which necessitates the sudden trading of stocks based on the interpretation of various indicators. Indeed, many proponents of asset allocation do not look on market timing as true asset allocation.

One recent example of market timing was the decision by Renaissance Investment Management Inc. on Monday, Oct. 16, to move assets from bonds into equities. Renaissance is believed to have bought 44 million shares of stocks, thus contributing sizably to the market rebound immediately following Oct. 13's 190-point drop in the Dow Jones industrial average.

``The core concern of the critics [of allocation] is what to do to defer market volatility,'' says Dennis Jarrett, senior vice president and coordinator of strategy for Kidder, Peabody & Company. His firm engages in some tactical asset allocation based on a ``dividend-discount model.'' But Mr. Jarrett says such an approach is very limited, including specific stocks and undertaken only for certain clients.

So far as asset allocation in general, Jarrett wonders how Congress could conceivably curtail its broad use. Investment fund managers, he notes, ``have a fiduciary relationship'' to their clients. Officials must not only earn market gains, but protect clients against market losses. Sharply limiting asset allocation - such as restricting the trading of large blocks of stock - could reduce the ability of a fund manager to protect a portfolio.

Barbanel of First Global worries that there is now far too much confusion about what constitutes ``program trading.'' Indeed, many experts point out that some folks believe program trading involves just the use of computers. That, of course, is not the problem at all: rather, the problem lies in the ability of traders to move large blocks of stock for short-term gains that have nothing to do with underlying stock fundamentals, or even necessarily with the day-to-day fundamentals of the economy.