As I have mentioned before, I am a fan of a small group of mutual funds categorized by Morningstar as “world allocation funds” and by Lipper as “global flexible portfolio funds”. These funds allow the manager to essentially invest anywhere in anything, subject to some risk boundaries. They let smart teams manage.
Today I participated in a call with the management team of a fund that is top-rated by both Lipper and Morningstar. It was down -20.87% in 2008, but still handily beat the S&P 500 by approximately 16%. Morningstar claims that over the past 10 years this fund has had average annual returns of 12.32% versus the S&P 500 at -1.38%. So, it has an excellent track record.
The fund remains mostly invested in global equities, 77%, with the rest in cash (US and foreign), fixed income, and gold.
While I use this fund extensively, this is a much more aggressive allocation than I would recommend most clients have overall. I am much less favorable to equities right now, but the fund clearly has an enviable track record so I listen to them closely. Here’s the summary of their commentary:
- While 2008 was an extremely difficult year, they are confident that losses they incurred are temporary, not permanent. They have avoided companies who have already failed or whose prospects are dim (e.g., financials and those that are over-leveraged). They claim to be investors in companies with stable, defensible, global franchises, so asset values are depressed, not permanently destroyed.
- Equity prices are currently low enough globally to offer selectively attractive buying opportunities for long-term investors (meaning those willing to hold for at least 5 years). The future is unpredictable over the more near term. They are hopeful, however, that current US government stimulus activities will provide a bottom for the economy later this year. No prediction was offered on when equity markets will bottom or recover (its “unpredictable”).
- While there are exceptions, fixed income is not a better buy than equities overall right now. Defaults may hit the high end of the range implied in fixed income prices.
- Gold and foreign currencies remain a valuable hedge against “unmanageable, unintended outcomes” of US government actions. Examples include inflation spikes and US dollar collapse. Current gold prices, however, are inflated by historical standards and this is now expensive insurance. (Commentary: their allocation to this asset class would seem to me to be too small to be an effective insurance policy.)