Twenty-five years ago, global allocation funds weren't even a blip on financial advisers' radar.
That's one reason why you can forgive Henry Goodwin for having been being especially excited when Merrill Lynch Investment Management trotted out its brand new global allocation fund, run by the relatively unknown Dennis Stattman and Bryan Ison, to him and dozens of other Merrill Lynch advisers in the summer of 1989.
In truth, Mr. Goodwin and the other advisers had made the trip to Princeton, N.J., to see Stephen Silverman, then portfolio manager of the Merrill Pacific Fund, which was at the time one of the hottest funds on the market. What Mr. Silverman had to say, however, quickly made the advisers a lot more interested in the newfangled global allocation fund.
He stood in front of the advisers, with a face only a Marine Corps officer could make, and told the crowd “every dime of my retirement fund is in that guy's fund” and pointed to Mr. Stattman, recalled Mr. Goodwin.
“At that point, we said, 'Maybe we should take another look at that,'” said Mr. Goodwin, principal at the Goodwin Group at Merrill Lynch Global Wealth Management. It wasn't long after that Mr. Goodwin started moving his conservative clients into the fund.
LEAP OF FAITH
It was a leap of faith. At that time, only about 17 global allocation funds existed. That number is 163 today, according to Lipper Inc.
A quarter century later, Mr. Stattman has made Mr. Silverman look pretty smart and Mr. Goodwin and his clients pretty happy.
Since the fund's inception, it has recorded an annualized return of 10.63% through the end of last year, beating the benchmark portfolio of 60% global stocks and 40% global bonds by more than 250 basis points a year. A $100,000 investment in the fund at inception would have grown to just over $1.1 million today, $500,000 more than the benchmark portfolio. That outperformance has come with about one-third of the downside.
In fact, it was the fund's performance when the tech bubble burst in the early 2000s that caused Mr. Goodwin to begin using the fund as a core holding for all his clients, and himself. From 2000 to 2002, the BlackRock Global Allocation Fund, as it is now known, gained 1.8%. The benchmark lost 16.88% over those same two years.
“I got religion, as we'd say in the south,” Mr. Goodwin said. “I thought it was virtually a miracle for a fund like that to not lose any money during that kind of decline.”
The fund has undergone a lot of changes over its 25-year life. Its staff has grown to 44, from just three, its assets have reached nearly $60 billion, from less than $10 billion in 2000, and it has moved from Merrill Lynch to BlackRock Inc. as part of the 2006 sale of Merrill Lynch's proprietary mutual funds. Mr. Ison, co-manager when the fund launched, retired in 2002.
The one constant throughout has been Mr. Stattman.
Even though the nature of the fund makes it an incredibly complex portfolio of 700 individual securities across the globe, Mr. Stattman sees his job as relatively simple.
“Ultimately, the first job is not to lose money,” he said. “The second job is to turn money into more money.”
A MORE CIRCUMSPECT SELLER
One of the things he's learned along the way to make that job easier is to be a more circumspect seller.
“Our bias is value, that's what comes naturally,” Mr. Stattman said. “The way value investors make money is they buy things at an attractive price. The way they sometimes end up having suboptimal returns is by being a little too quick to sell.”
The biggest challenge he faces today, like all advisers, is what to do about the fixed-income portion of the portfolio, given the current interest rate environment.
“We're always looking at managing volatility, managing risk, and providing some protection for investors. It's a balancing act,” Mr. Stattman said. “In our view, we have to be underweight fixed-income because there's not enough reward per unit of risk.”
One bright spot he does see in equities is the Japanese stock market.
“It's very attractive,” he said. “But we want to be somewhere between partially and fully hedged against the yen.”