Investing in the U.S. is a bit like walking a tightrope these days. With stock prices near five-year highs and bond yields extremely low, it's a delicate balancing act to get solid returns, especially if markets start to wobble.
But U.S. stocks and bonds aren't the only way to go. Some advisers recommend funds that add in other investments — including emerging-market stocks and bonds and "alternatives" like commodities and gold — in a bid to generate bigger gains and to help lower risk.
"We like the global scope of these funds, and you get exposure to U.S. markets as well," says Jim Holtzman, a financial adviser with Legend Financial Advisors in Pittsburgh.
Part of the appeal of these funds is that they hold assets that aren't tightly correlated. Stocks and Treasury bonds usually move in opposite directions, for example, helping to smooth out returns. But adding in assets such as currencies, commodities and foreign stocks — if done with some precautions — can also help boost long-term gains.
It's a pitch that's resonating in today's market. After a "lost decade" of returns in U.S. stocks, many investors want funds that have the flexibility to invest globally across a range of assets, says Tom Roseen, head of Lipper Research Services. Indeed, "global strategy" funds have taken in $14.4 billion in new assets this year, according to Lipper. Domestic stock funds, by contrast, have seen outflows of nearly $50 billion this year — a vote of no-confidence in U.S. stocks by investors wary after two crashes in the last 12 years.
Global strategy funds don't shine in all markets, of course. They lost an average of 29% in 2008, according to Morningstar, and fell again last year, losing 4%. And while they're up 8.8% this year, they are trailing the MSCI All-Country World Index, which makes sense. With only a fraction of their assets in stocks, such funds are likely to lag global stocks in a strong bull market.
The flipside is that they have the flexibility to get defensive in times of peril. They can move out of risky assets and into government bonds to preserve capital. And many funds hold positions in gold as a kind of insurance policy against a market crash. Over a full market cycle that flexibility can produce higher returns because the climb back from a bear market isn't as steep – which makes it important to stick with these funds through down as well as up markets.
"The deeper the ditch the harder it is to get out of," says Mebane Faber, a global portfolio manager with Cambria Investment Management in El Segundo, Calif.
Investors can craft their own global strategy, of course, using low-cost index funds or ETFs. But this can be tricky, and most investors wind up trailing the major indexes. The average stock fund investor earned 3.8% a year from 1991 to 2011 versus a return of 9.1% a year on average for the S&P 500 (.SPX), according to research firm Dalbar. Investors in bonds funds trailed the market as well.
If you're going to use global strategy funds, most pros recommend them as "core" positions in your portfolio. Holtzman, for one, advises young clients to put 50% to 80% of their retirement savings in these funds since they provide such broad diversification. For clients closer to retirement, he recommends 10% to 25%, in part because they may need more income and can't handle as much volatility.
Also important: Keep these funds on a tight leash. The managers can make changes at any time so you'll need to monitor these funds closely and keep tabs on how they mesh with your other investments. A fund that starts the year 30% invested in stocks and ends at 60% may become too risky, especially if you have stock exposure elsewhere in your portfolio.
To find compelling offerings, we screened for funds with solid, long-term performance. Fees for global strategy funds tend to be high, and we looked for annual expenses below 2%. We also evaluated other factors, including how the funds fared in falling markets and their overall volatility. Below are four funds to consider:
First Eagle Global Fund
- Three-year annualized return: 8.8%
- Expense ratio: 1.88%
Launched in 1979, this is one of the oldest and largest global strategy funds, and it has racked up an impressive record, returning an average 14.1% a year since inception, versus 9.5% for the MSCI World Index. The fund lost 21% in 2008, about half the loss suffered by the index. And over the last decade, it has beaten 96% of peers, according to Morningstar.
While legendary investor Jean-Marie Eveillard is no longer at the helm, the fund is managed by a team of veterans who use a similar value-oriented strategy. The managers look for stocks with a wide margin of safety, trading well below their estimates of a company's "intrinsic" value. Once that margin of safety disappears — as it did recently with holdings such as Home Depot (HD) and chip maker KLA-Tencor (KLAC) — they sell the position.
The $36 billion fund currently holds about 36% in international stocks and 34% in U.S. stocks. That makes it more stock-heavy than other global strategy funds and potentially more risky. Yet the managers take some precautionary measures: They hedge part of their foreign currency exposure in euros and yen, and they hold 10% in gold-related investments, including 5% in gold bullion, which should help cushion the fund against a sell-off in risky assets.
Some investors may balk at the fund's annual fees, especially since it currently holds around 18% in cash. That could hold back returns if the market rallies, says Morningstar analyst Bridget Hughes. But it also gives the managers dry powder to take advantage of a sell-off and it provides some ballast against a crash. "They're opportunistic and flexible," says Hughes, and the fund has proven resilient over the years.
PIMCO All Asset Fund
- Three-year annualized return: 9.7%
- Expense ratio: 1.36%
Investors may not be worried about inflation now. But at some point, it's likely to pick up and that's when PIMCO All Asset (PASDX) may shine the brightest. The fund targets returns of 5% above the consumer inflation rate over a full market cycle. And even though inflation has been tame over the last three years, the fund's 9.7% annualized return has beaten 94% of peers, according to Morningstar.
Run by academic theorist Rob Arnott, the fund invests in about 40 other PIMCO funds, holding everything from foreign stocks to corporate bonds and alternative investments such as commodities and real estate. While it has fared well in bull markets, its real strength has been holding up in downturns, losing just 16% in 2008, for example, according to Morningstar.
Arnott tweaks the fund's mix based on his views of global economic trends and relative values, for example, seeing much better opportunity right now in emerging market stocks and bonds than U.S. stocks or debt. And he has wide latitude to invest where he sees the best combination of risk and return.
One risk of this fund is that it takes cues from PIMCO's firm-wide views on the economy and global markets. If those views prove wrong, the fund could stumble, notes Morningstar analyst Kevin McDevitt.
Another risk is the fund's heavy exposure to bonds and "credit strategies," which account for 65% of assets. Should bonds sell off, returns are likely to lag. The fund does offer an attractive 3.5% yield, though. And it has racked up a top record in the category when adjusting for the amount of risk it takes, according to Morningstar.
Fidelity Global Strategies Fund
- Three-year annualized return: 7.9%
- Expense ratio: 1.21%;
Beating the market as a stock- or bond-picker isn't easy, even for the pros. Fidelity Global Strategies Fund (FDYSX) takes another tack, aiming to generate above-average returns by holding most of its assets in ETFs and tactically adjusting the mix. The ETFs invest in everything from U.S. stocks to commodities, foreign real estate and gold. The rest of the portfolio consists of actively managed Fidelity funds, including top performers like Fidelity Floating Rate High Income Fund (FFRHX) and Fidelity New Markets Income Fund (FNMIX).
While the fund has been volatile in recent years, it now focuses on both beating its benchmark and preserving capital. "If the market is down 20% we don't want to lose 18% and pat ourselves on the back," says co-manager Jurrien Timmer.
Indeed, the fund captured 83% of the market's upside in the last year and only 57% of the downside, according to Morningstar. Overall, the fund is about half as volatile as the stock market, with a 7.9% annualized return over the last three years.
With the global economy slowing, Timmer and his team see few reasons to add more risky assets now. They reduced the fund's stock exposure last spring as they grew concerned about slowing global growth. And Timmer says it's unclear if stimulus measures by central banks will succeed in boosting global economies. For now, he's waiting for more evidence of a turnaround. When that happens, he says, "we'll be as bold as we need to be."
BlackRock Global Allocation Fund
- Three-year annualized return: 5%
- Expense ratio: 1.92%
BlackRock Global Allocation (MCLOX) casts a wide global net with more than 500 stocks, bonds and hybrid securities in its portfolio. No single position accounts for more than 2% of the fund, and the managers invest opportunistically across global markets, holding everything from big U.S. stocks to Swiss preferred shares and Brazilian corporate bonds. The team also uses options to manage currency and market risks, and holds 14% in cash, which is on the high side historically.
Since the fund launched in 1989, it's been one of the stronger performers in the category. Annual returns have averaged 10.4%. And the fund held up relatively well during the bear market of 2008, losing 21.2% compared to a 29% loss for the average fund in its category, according to Morningstar.
The fund has lagged a bit since the 2008 sell-off. The portfolio has stayed somewhat defensive, says Mike Trudel, global strategist for the fund. It's held more cash than usual, lowered exposure to bonds, and avoided the most cyclical, high-flying stocks — moves that have held back returns. Yet developed market bond yields don't look attractive, says Trudel, and stock valuations look "excessive" in areas such as housing, financials and consumer-staples. "Our view is that the Western consumer is still very challenged," he adds.
More appealing to the fund's managers now are some energy and health care stocks. And they like Japanese stocks that Trudel says have market values "below the net cash on their balance sheets."
Granted, all these positions may not pan out and the fund's expenses are on the high side. But the managers have shown a willingness to weather "short-term bumps" to preserve capital, notes Morningstar analyst Michael Herbst. For investors who stick with the fund, that approach may pay off.
Daren Fonda is Senior Writer and Investing Columnist with Fidelity Interactive Content Services, a provider of objective investing content on Fidelity.com. He does not own any of the securities mentioned in this article.