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.