In the face of growing volatility in the markets, world-allocation funds, sometimes referred to as "go-anywhere" funds, are gaining appeal among investors. While many fund managers are limited to a particular size of company or slice of the market, managers of go-anywhere funds have the flexibility to do just that: spread their investments throughout different parts of the world and among various asset classes like stocks, bonds, and commodities.
"A lot of investors coming out of the financial crisis wanted to give managers perhaps more latitude to be able to make shifts in asset allocation based on valuation," says Kevin McDevitt, editorial director with Morningstar. Since the beginning of 2008, investors have pulled $154 billion from stock funds and poured $633 billion into bond funds, according to Morningstar. At the same time, they've added almost $33 billion to world-allocation funds.
One of the biggest advantages of world-allocation funds is that managers have the freedom to pick and choose the securities they feel are most attractive at any given moment, says Jason Brady, comanager of Thornburg Investment Income Builder (symbol TIBAX), a world allocation fund. Before the financial crisis began in 2008, Brady says the fund had as much as 85 percent of its assets in global stocks. But when the market began to slide, the team was able to load up on bonds, which accounted for nearly half of the portfolio at the end of the first quarter of 2009. Now that company balance sheets are improving, Brady says about 80 percent of the fund's assets are in stocks.
This category has plenty of newcomers. Of the 114 funds listed in Morningstar's world-allocation category, more than a third have launched since the beginning of 2010. For the funds with longer track records, the results have been decent. Over the past five years, the average world-allocation fund has returned an annualized 4.4 percent, according to Morningstar. Given that these funds generally have a standard allocation of about 60 percent of assets in global stocks and 40 percent in global bonds, the best way to measure their performance is to compare them with a benchmark allocation of 60 percent stocks of the MSCI World Index and 40 percent bonds of the Barclays Capital Global Aggregate Index. Over the same trailing five-year period, the returns of that customized index were 3.9 percent. Still, that may not be a fair comparison because some mangers invest a wide variety of assets, including real estate and commodities. "It's the broadest category Morningstar has," McDevitt says.
Depending on an investor's risk tolerance and time frame, world-allocation funds can be used as core holdings, McDevitt says. But it's important to choose a manager with a proven track record. "This is an area where you really have to do your homework and make sure [the mangers] know what they're doing, because you're giving them a lot of freedom," he says.
McDevitt points to four world-allocation funds with solid long-term track records: BlackRock Global Allocation (MDLOX), First Eagle Global (SGENX), Ivy Asset Strategy (WASAX), and PIMCO All Asset All Authority (PAUAX). As is common within this category, each fund's holdings vary widely.
The managers of BlackRock Global Allocation are bullish on big U.S. stocks, which they believe are poised to take advantage of growth outside of the United States in the emerging markets. U.S. stocks make up the largest allocation of the fund (35 percent), followed by foreign stocks (29 percent) and foreign bonds (16 percent). In the fund's fourth-quarter commentary, management took a cautious tone: "Given the low interest rate environment and the potential for further quantitative easing from developed economies, we maintain a 5.4 percent weight to gold, gold miners and other precious metal related securities."
The First Eagle fund has a hefty allocation to gold and gold-related stocks (10 percent of total assets), as well as a fairly large bet on Japanese stocks. About a quarter of the fund's stock portfolio was invested in Japanese companies as of the end of February.
The team at Ivy Asset Strategy has an extremely broad mandate. At any given time, it can invest up to 100 percent of the fund in a single asset class, such as stocks or bonds. As of late, the fund has virtually abandoned the fixed-income market. In its annual report, management said: "With respect to fixed income, although these products have outperformed equities over the last decade, we don't believe this trend to be sustainable." Recently, almost half of the fund's net assets were invested in foreign stocks.
Rob Arnott mans the PIMCO fund, which invests in several underlying PIMCO funds. Arnott aims for returns of 6.5 percent plus inflation. At times, the fund will short stocks and use leverage. Currently, about 18 percent of the fund is invested in an underlying PIMCO fund that shorts stocks. The fund's other two largest investments are in Bill Gross's PIMCO Total Return (PTTAX), which generally sticks to the investment-grade bond realm, and PIMCO Unconstrained Bond (PUBAX), that has the ability to invest in a wide range of fixed-income securities.