As more fund companies rush to market with global allocation funds, it is becoming increasingly difficult for financial advisers to figure out which ones are worth their time and which are duds.
And without set benchmarks, many advisers wonder how to screen these funds.
Global asset allocation funds, also known as go-anywhere funds or global flexible funds, allow their managers to jump in and out of different sectors and geographic regions without constraints. But with greater flexibility comes greater risk.
“Flexibility is the benefit — and also poses a concern about these funds,” said Thomas Balcom, a financial adviser with Ibis Wealth Management LLC, who invests in
Invesco's Global Tactical Asset Allocation Fund.
So far this year, there have been 17 launches of global flexible funds, according to Lipper Inc.
Since the beginning of 2008, such funds have garnered $18.9 billion in net flows. The funds had a total of $200 billion in assets under management as of May 31, according to Lipper. For the three-year period ended June 30, the global flexible fund category returned 2.75%, and the S&P 500 Daily Reinvested Index returned 3.34%, according to Lipper.
The rush to market with these funds is a response to shareholder demand for products that aren't chained to a specific mandate when markets turn.
“The popularity of this investment concept is based on the idea that equities have stunk over the past decade and people are looking for alternatives because they want something that doesn't go down,” said Art Steinmetz, chief investment officer at OppenheimerFunds Inc. and the lead manager of the firm's Global Allocation Fund. “It's about putting faith in the manager who will jump from log to log in the river, based on what logs are floating and which are sinking.”
Because managers have such flexibility in what to invest, it is crucial that advisers have a solid understanding of the parameters of the fund, who the managers are and what their processes are, observers said.
"EXTRA LEVEL OF RISK'
“By investing in these funds, you are opening yourself up to an extra level of risk,” said Dylan Cathers, a mutual fund analyst at Standard & Poor's Financial Services LLC. “Investors really need to make sure they understand the managers, and that they know what they are doing.”
For the most part, firms are putting their top talent behind these funds, said Don Phillips, president of fund research at Morningstar Inc.
“This is one of the areas that has cachet in the actively managed space, and so a lot of fund companies are saying, "Let's put our superstar manager on these funds,'” he said.
But that doesn't mean that advisers don't need to do their homework, Mr. Phillips said.
Many advisers like Mr. Balcom don't just want to know about the lead manager. They also want information on the expertise of the entire management team.
“Having a team is important because you want fixed-income and equity expertise,” Mr. Balcom said.
At Ivy Funds, which manages the $29 billion Ivy Asset Strategy Fund, all the firm's portfolio managers meet for an hour and a half each day to discuss the markets and what is going on in the world, said Tom Butch, the firm's president.
“It's from that conversation that they glean information for the management of the portfolio,” he said.
And it is important that when the managers make a decision to change the portfolio, the sales team is able to convey that to advisers, said Mike Bailey, national sales director for the
Bank of America Merrill Lynch channel at
BlackRock Inc., which manages the behemoth $55.1 billion Global Allocation Fund.
“We need to constantly keep our investment professionals up to speed on the portfolio positioning,” he said.
BlackRock sends its employees weekly e-mails updating them on the state of the Global Allocation Fund and the Strategic Income Fund, a fixed-income-oriented go-anywhere fund.
Understanding the managers' track record is also important, Mr. Steinmetz said. “You want managers with expertise in global investing,” he said.
Given the loosey-goosey nature of these funds, however, benchmarking can be impossible.
Many firms have customized benchmarks that they use internally as a guideline, but advisers need to take those with a grain of salt, Mr. Cathers said.
“That's all well and good that there is an internal benchmark, but it doesn't help advisers compare one fund to another,” he said. “We need some kind of standards.”
But for now, customized benchmarks can give advisers an idea of what the fund is trying to do, Mr. Phillips said.
“It's some kind of commitment from the organization that there are some kinds of combinations of asset classes that they think will represent where the fund is going to go,” he said.
Another challenge for advisers is figuring out how much they should allocate to these funds.
Most advisers use the funds in the alternative-investment sleeves of their portfolios, said W. MacCarter Sims, head of intermediary distribution at Schroder Investment Management North America Inc., which manages the Multi Asset Growth Fund.
Mr. Balcom, for example, currently is investing 10% of his alternative-investment bucket into these funds. “We will add more money to the portfolio after we watch it a bit,” he said.
“Only time will tell if this strategy makes sense,” Mr. Sims said.
E-mail Jessica Toonkel at [email protected].
