Investors have long been told that asset allocation is the single most important driver of returns. Now, with U.S. stocks sinking, emerging markets in turmoil, and interest rates on the rise, a good case can be made for outsourcing some of big-picture decisions to managers of global allocation funds.
“They are closer to the opportunities and the risks, and they wake up every day and think about these things,” says Jeffrey Ingraham, a portfolio strategist at Manning & Napier Advisors, which manages single-asset class, multi-asset class, and global allocation strategies.
Global allocation funds run the gamut when it comes to investment philosophy and strategy. Because they typically have carte blanche to invest across almost every asset class and region, they are particularly useful during times of market transition, as they can move quickly to sidestep risk or jump on opportunities.
“We can make some pretty meaningful shifts,” says Jim McDonald, chief investment strategist at Northern Trust and co-manager of the $91 million Northern Global Tactical Allocation fund (BBALX). While the fund is tiny by most standards, it lets investors piggyback off asset-allocation guidance that the firm offers its institutional clients. It has returned an average of 6.9% a year over the past decade.
To arrive at allocation decisions, McDonald and nine of his colleagues—including heads of fixed income, equity, and asset allocation, among others—meet monthly to discuss their views and put them to work with a portfolio of exchange-traded funds. Some notable shifts: The team was significantly underweight equities leading up to the financial crisis and moved back into stocks in February 2009. In 2017, they overweighted emerging markets and overseas developed markets. Over the past six months, they’ve reversed course, shifting some assets out of overseas stocks into U.S. bonds.
“Selectivity is going to be critical,” says Matthew McLennan, co-manager of the $53.7 billion First Eagle Global fund (SGENX), which is up an average of 8.2% a year over the past decade.
Although it shares the same category as the Northern Global Tactical Allocation fund (BBALX), First Eagle Global, launched in 1970 by legendary investor Jean-Marie Eveillard, tends to move gradually among asset classes. Its overall objective is “resilient wealth creation,” says McLennan, noting that allocation decisions are driven by individual investment ideas rather than macroeconomic calls.
Even so, McLennan and his co-manager, Kimball Brooker Jr., have been tilting the portfolio toward more-defensive sectors, including energy and consumer staples. They also like gold bullion, which was recently 7% of the fund’s assets and is an “attractive alternative to owning Treasuries,” McLennan says.
There are many ways to think about asset allocation, but most investors construct portfolios based on time horizons or risk tolerance, or a combination of the two. Because global allocation funds tend to take a more dynamic approach, it can be difficult to pinpoint the role of the fund and then choose the best fund for the job.
There are 111 distinct funds in Morningstar’s world allocation category, and every one potentially does something different. “It’s like asking who is the best baseball player: Do you mean who is the best pitcher, the best hitter, or the best short stop?” says Joe Mallen, chief investment officer at Helios Quantitative Research, which creates investment models for financial advisors and other professionals.
As a category, global allocation funds returned 7.6% over the past decade, versus a 14.6% total return for the S&P 500 (.SPX). The gap reflects the funds’ diversity of objectives: Some focus on income, for instance, while others invest in defensive assets. The category outperformed the market in the 2008 crash, losing 29% versus the S&P 500’s 37% loss.
Investors with small accounts might use a global allocation fund as a core holding, or potentially the only holding, says Mallen. Other investors might want to earmark a percentage of assets to a global allocation fund as a hedge during market turbulence. Still others might use global allocation as a way to juice returns or earn steady income.
Whatever the goal, investors should pay particular attention to the history and track record of the management team. Its decisions can dramatically influence returns, arguably far more than in, say, a large-cap growth fund.
In the case of the $15 billion Thornburg Investment Income Builder (TIBAX), the singular focus is on generating income, although the fund can make dramatic changes to get above-market yield. After the financial crisis, the fund increased its bond holdings to more than 40% of assets as it scooped up highly discounted bonds offering healthy yields. Today, 90% of the fund is in dividend-paying stocks, with financials making up a quarter of that exposure.
“I really don’t like the bond market right now,” says Brian McMahon, the firm’s chief investment officer and a co-manager of the fund, who is concerned about the barrage of assets that have flowed into bonds over the past decade. Markets, he says, are in transition, making allocation decisions paramount. “On a scale of one to 10,” he says, “I would put allocation at an 11.”
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