With market prices currently bouncing around like a rubber ball, investors have begun looking for funds with the right mix of equities, fixed income, and alternative assets to shore up their portfolios. Global “go-anywhere” funds may be an alternative for these investors.
Net flows into the conventional funds business (excluding exchange-traded funds) have been somewhat lopsided over the last few years, with bond funds collecting the lion’s share of the booty. However, investors have not given up on equity funds entirely, generally injecting net new money primarily into world equity funds, mixed-asset (target date and target risk) funds, and select commodity funds.
One of Lipper’s mixed-asset fund classifications that has gained recent popularity is the go-anywhere Global Flexible Portfolio Funds classification, which has garnered the largest share of net new money of any equity or mixed-asset classification, attracting $38.7 billion for the year ended July 31, 2011. (By comparison, the classification with the next largest draw of investor assets was Emerging Markets Funds, with $31.2 billion.) Fund companies, seeing the increase in demand for these go-anywhere funds, brought 13 new fund offerings to market in 2010 and an additional 20 so far in 2011.Total assets under management in the Global Flexible Portfolio Funds group jumped 87% from October 2007 to July 2011; to $188 billion.
This hybrid group of global mixed-asset funds is the epitome of the go-anywhere style of investing. Investors in this fund classification give the portfolio manager carte-blanche approval to invest in any global asset class the manager feels is appropriate for the existing market: stocks, bonds, cash, commodities, real estate investment trusts (REITs), and/or alternative investments. In some cases the manager takes long or short positions or uses futures, options, and other derivatives to meet the fund’s investment goal or to manage portfolio risk.
Portfolio managers in this group can use many investment opportunities that are not easily available to the general investing public, and that can be an attractive choice for smaller investors looking for a solid-core investment with a broad-based go-anywhere mandate.
At first glance, the average global flexible portfolio fund appears to deliver as promised. For the week ended August 11, 2011, which was rocked by four consecutive 400-plus up and down days for the Dow Jones Industrial Average, the average global flexible portfolio fund handed back 1.53% of its prior week’s ending value, while the S&P 500 Daily Reinvested Index lost 2.21%. For the three-month period ended August 11 the average global flexible portfolio fund (losing 7.63%) mitigated losses better than the S&P 500 Daily Reinvested Index, which lost 12.17%. So, on average this group of funds appears to be able to soften the impact of large swings in the general market . . . if the manager makes the right bet. For the three-month period returns ranged from minus 41.07% (ouch, YieldQuest Core Equity Fund; Investor) to 5.02% (the Y share class of INVESCO Balanced-Risk Allocation Fund).
For the ten-year period ended August 11 the Global Flexible Portfolio Funds classification (+6.36%) outpaced the S&P 500 Daily Reinvested Index (+1.86%) by 450 basis points, highlighting the benefits of investing in global securities and of the professionally managed asset allocation process. However, on the flip side Global Flexible Portfolio Funds (+24.96%) underperformed the S&P 500 Daily Reinvested Index (+26.46%) in 2009—the strongest performance years since 2003.
In 2008—one of the worst market declines in the last 50 years or so—these funds did not hold up all that well when almost all asset classes moved in the same direction: down. The average global flexible portfolio fund lost 31.15% that year, while the average equity fund handed back 39.54%. One would expect that a fund that invests in both fixed income and equity securities would be better able to mitigate losses in a turbulent market, but that might not always be the case.
Here is the rub: This classification is not a homogenous group, and finding the right fund takes some work. With such a broad mandate, managers can hold the entire spectrum of investments during any given period of time. When we reviewed the most recent portfolios of these funds we found extreme differences in their asset allocation and portfolio makeup. While the average fund in this group allocated 51% of its assets under management to common stocks, 26% to bonds, 5% to cash, and 18% to other asset classes (reminiscent of the 60/40 split of balanced funds), we identified one fund that allocated 98% to common stock, another that allocated 96% to bonds, and yet another had 94% allocated to cash, epitomizing the title of “go-anywhere” funds.
With such broad mandates within the group, it’s a good idea to check under the hood before buying. Here are a few questions to ask that might help the process: Am I looking for a fund that utilizes alternative asset classes? If so, does the management staff have experience with the security types being used? If the fund is allowed to take short positions, is the manager an old hand or a fledgling newbie at selling securities short? Some of the older funds are less likely to use alternative investments and are more likely to focus on a mix of equities, fixed income, cash, and perhaps commodities and REITs to reach their goals. Since we have recently gone through boom and bust periods, check to see how the fund did in 2008 and then again in 2009 and 2010. You should get a feeling of how the portfolio manager handled the investments during these extreme market cycles.
One of the major concerns when you purchase global flexible portfolio funds is to avoid a management team that appears to be a jack of all trades but that turns out to be a master of none. Just because a manager was outstanding at investing in long positions does not mean he or she is experienced at selling securities short or using derivative products. That’s why many planners decide to pick the best-in-class fund or manager when building a portfolio, finding the best bond manager, best equity manager, best short-biased expert, and so forth. However, this approach is very labor intensive and possibly not feasible for smaller accounts. Fortunately for us, some funds have hired best-in-class managers to run certain portions of the portfolio. A little due diligence can go a long way in this group: Of the 94 unique funds residing in the Global Flexible Portfolio Funds classification, 27 are fund-of-funds offerings, with 15 of those offerings being unaffiliated fund combinations (one assumes a best-in-class offering). In addition, another five funds in the group offer a manager-of-managers’ product rather than a fund-of-funds product.
When you are evaluating the addition of a fund such as these to a portfolio, there are other concerns as well—securities overlap, for example. Since there is no predetermined style or capitalization size, there is some likelihood you will find identical securities somewhere else in the portfolio. In addition, because of the go-anywhere mandate and fund structure, trading costs and expenses to run the fund might be on the high side, meaning the advisor should be evaluating both expenses and tax drag on the portfolio. Remember, for fund-of-funds products compare direct expenses (the cost to advise and administer the fund) and indirect expenses (the costs of the underlying funds) of the fund, rather than just the annual total expense ratio. For comparison purposes the average prospectus expense ratio for the group is 1.58%, definitely on the lofty side.
Despite a horrible group return for 2008, global flexible portfolio funds do offer investors an opportunity to purchase professionally managed global portfolio concepts, which use multiple asset classes to meet intended goals. Some of the newer funds also attempt to minimize risk through the use of long/short strategies and derivatives. And, in recent months the group appears to be weathering the stormy markets better than other classifications of funds.
We have identified three global flexible portfolio funds that rose to the top of their Lipper peer group for the three-year period ended July 31, 2011. We used the Lipper Leaders rating for Consistent Return to identify the top-performing risk-adjusted funds within their category for the period, along with Lipper Leaders for Total Return. (In the table below, just click on the hyperlink for each fund to delve deeper into the fund’s investment mandate, expenses, and top-ten holdings and to discover other interesting tidbits that might help determine your final purchase.)
Tom Roseen, is a senior analyst with Lipper.
He is the editor and an author of Lipper's U.S. Research Studies,
Fundflows Insight Reports and Fund Industry Insight Reports.