Adventurous mutual funds for uncertain times
World allocation managers are scouring the globe for the best opportunities.
301 Moved Permanently
(Fortune Magazine) -- Today's market is particularly tough for individual investors. Stocks have been wildly volatile, bonds offer low yields, and the experts caution that even when the economy recovers, growth will be weak and inflation a threat.
Under conditions like these, world allocation funds may have a distinct advantage. Rather than focusing on one type of investment, they are free to search the globe for opportunities and move nimbly in and out of different types of assets.
World allocation funds can buy anything from blue-chip U.S. stocks to esoteric assets like Japanese inflation-protected securities, emerging-markets bonds, European dividend swaps, and gold bullion. Some also sell stocks short.
The flexible approach pays off in the long run: While the S&P 500 (SPX) has lost 1% (annualized) over the past five years, the average global allocation portfolio has gained 5%. "Because we have a broad authority to look for mispriced assets," says Ben Inker, manager of Evergreen Asset Allocation, "we have opportunities to make money in areas that many investors never think about."
When evaluating world allocation funds, says Jeff Tjornehoj, a senior analyst at Lipper, check how they've performed over several market cycles to make sure that strong performance numbers are not just the result of one or two lucky bets (good advice when choosing any fund).
Bridget Hughes, an associate director at Morningstar, says the actual composition of each fund is not as important as who is at the helm. "It's less of a bet on the breakdown of assets and more about the particular manager," she says. "Because [the funds] are so flexible, you've got to put a lot of trust in whoever is running them."
For that reason, one of her top choices is BlackRock Global Allocation, which has $28 billion in assets. Its manager, Dennis Stattman, has run the fund since its inception in 1989; over that time the fund has returned an average of 11% a year. The fund has a 5.25% sales charge and annual expenses of 1.1%. Stattman "takes a top-down approach," says Hughes, meaning he looks for investments that will benefit from global trends.
As the credit crisis hit last year, Stattman guided the fund away from riskier equities and bonds and suffered a 21% loss, compared with a category-average drop of 28%. At the end of 2008 he began upping his stake in equities, where he now has 53% of his assets.
Because he thinks the U.S. consumer will continue to struggle with debt, he's overweight on Asian stocks as well as domestic sectors that have higher dividend yields, like telecom and health care. He also holds Treasury Inflation-Protected Securities, or TIPS, and gold. "The governments of the world are spending more money than they're taking in," he says, "so we have long-term inflationary expectations."
At first glance, International Value Advisers' Worldwide looks untested - the fund launched in October 2008. But its manager, Charles de Vaulx, was the former head of First Eagle's massive Global Fund, where he labored under the tutelage of renowned French value investor Jean-Marie Eveillard.
After leaving First Eagle, de Vaulx joined his associates and and quickly attracted more than $1 billion in assets to the Worldwide Fund. So while it's difficult to evaluate IVA's performance so far (the fund started with a huge cash position and is up 13% in its first 10 months, vs. -7% for the category), de Vaulx's consistent success at First Eagle bodes well for the future. It has a 5% sales charge and annual expenses of 1.4%.
Since launching IVA Worldwide, de Vaulx has profited from a number of smart moves, such as buying USO, the oil ETF, and beaten-down Japanese stocks like Makita and Canon. The fund has since snapped up U.S. equities - de Vaulx prefers cash-rich tech companies like Microsoft and Dell - and better-quality high-yield bonds in the U.S. and Europe.
Like Eveillard's, de Vaulx's investing style is conservative, but he says he's moving in and out of assets more quickly than usual these days. "Our turnover is lower than most," he says, "but because there's so much volatility right now, we're being more nimble."
Despite a tough 2008, when it fell 26%, Ivy Asset Strategy still has one of the best long-term records in the world allocation category, earning an annualized 14% over the past five years - triple the group average for that time - and 8% since manager Mike Avery started at the fund in 1997. It has a 5.75% sales charge and annual expenses of 1%.
Avery's losses last year came largely from bullish bets on global cyclicals. He unwound those positions, moving most of the fund's assets into cash. Lately, though, he's put the money back to work in stocks, which now represent 70% of the portfolio. The theme behind that move, he says, is China: "The best growth prospects are stocks that sell to their emerging middle class."
Avery owns shares of financial services companies like China Construction Bank and multinationals like Visa, which he thinks will benefit from China's growing credit card use. He admits there are some attractive Chinese consumer products stocks he can't yet buy because of foreign trading restrictions. It seems even go-anywhere funds have their limits.