It's hard to make money when everything you invest in is losing value. Much as in the market downturn of 2002, most stock funds this year find themselves on the wrong side of the ledger.
While most managers are restricted by fund mandate to a specific part of the market, those with more flexibility can move out of the way if they see trouble and dive in where they find opportunity, regardless of asset class, region or market cap. Not only do these flexible funds try to pick the best and avoid the worst securities in a given asset class or market, but they can also sell them short (bet they'll go down) and shift money between asset classes and markets based on their macroeconomic views. Several fund managers using this type of approach have avoided the large losses that have plagued the average stock fund over the past 12 months.
Investing in a go-anywhere, asset-allocation fund can pay off in a variety of markets if the manager is skilled. It can also cause a lot of pain if the manager stumbles. But if you find a talented manager who can use the added freedom well, flexible asset-allocation strategies can serve as a nice complement to a diversified portfolio. Below we highlight a trio of funds that we think have done a fine job of navigating today's choppy markets and show long-term potential.
BlackRock Global AllocationManager Dennis Stattman's defensive bets at the BlackRock Global Allocation (MDLOX) fund have worked brilliantly in the past year and over the long haul. In early 2007, he grew leery of U.S. consumers' low savings rate and worried that banks had overextended credit, so he limited the fund's exposure to U.S. financial companies.
He also thinks the housing collapse has shrunk, and will continue to shrink, squeezing baby boomers' retirement assets, which could put a damper on domestic spending for the next decade or two. So he has avoided most U.S. consumer discretionary stocks, too.Finally, the fund wagered against small caps by short-selling the Russell 2000 Index ($RUT.X), a bet that pays off when the index loses value. Shareholders have benefited from these moves. The fund managed to eke out a 2.3% gain over the 12 months ended July 2008, while its world-allocation rivals and the vast majority of other funds in the Morningstar universe have lost money.
There are many moving parts here (the fund can delve into U.S. and international stocks, bonds, commodities, currencies and derivatives), and Stattman's bets aren't always spot-on, but the fund has delivered impressive risk-adjusted results over the long haul. We think it will continue to do so, given Stattman's experience in running this flexible style. (He has been at the helm since the fund's inception in 1989.)
Pimco All AssetManager Robert Arnott of subadvisor Research Affiliates uses a much more quantitative method to pick the Pimco All Asset (PASDX) fund's spots.
He has developed models that assess yield, growth and valuation metrics of various asset classes as well as the relationships between them, drawing on those results to determine the optimal mix of Pimco funds.