A Fund That Does It All
The investment world seems to grow more convoluted by the day. Sector funds proliferate. Sponsors of exchange-traded funds issue ETFs of increasingly narrow scope (and dubious merit). What if you could simplify things and merely make a one-investment decision?
That's more or less the goal of BlackRock Global Allocation, which invests in stocks and bonds around the world. "The industry has gone toward highly specialized funds," says portfolio manager Dennis Stattman. "This is a single-fund solution that provides diversification and asset allocation."
It turns out this old-fashioned fund does an outstanding job. Stattman has run the fund since its inception in 1989, when it bore the Merrill Lynch name. For the five years through July 17, Global Allocation (symbol MDLOX) returned 14% annualized, four points ahead of its balanced-fund benchmark. For 2008, the fund is down 4.4%, compared with an average loss of almost 8% for the world allocation category.
Stattman aims to eke out a positive return for investors in any climate. "Up and behind the benchmark is better than down and ahead of benchmark," he says. To reduce risk, he makes full use of the global canvas on which he paints.
For instance, he's been underweight in the U.S. market. Stattman is troubled by the lack of household savings and the current cycle of credit contraction. He's also vexed by the Federal Reserve Board's interest-rate policies. For example, he notes that the Fed funds rate (which is what banks charge to lend their reserves to each other overnight) is only half of the rate of inflation in consumer prices -- an abnormally and unsustainably low level. The Fed, he says, is more focused on propping up a weak banking sector than on addressing "rocketing commodity prices."
Stattman says that some banks look cheap by traditional measures, such as price-to-book values. But he says these measures are misleading when investment banks and other financial institutions are deploying enormous leverage on their balance sheets. If a company is leveraged 25:1, he says, even small mistakes can wipe out the business. Just ask Bear Stearns.
Stattman worries about inflation, too. He says that there are approximately 750 million consumers in developed economies, such as the U.S., Europe and Japan. That number will essentially double in fairly short order thanks to the rapidly growing middle classes of China, India and other emerging markets.
"These people don't want variable annuities; they want air-conditioning and cars, and they're competing for the same resources," he says. Car sales in China this year will be 7 million, rising to 10 million in 2010, compared with just 780,000 in 2001.
So he still likes natural-resources stocks and companies with strong pricing power in an inflationary environment. For instance, two of his top ten holdings are railroad stocks, Burlington Northern Santa Fe (BNI) and Union Pacific (UNP).
Stattman argues that most American investors are still woefully underweight in their overseas stock and bond portfolios. "The risk is not being exposed to these markets," he says. "I think all investing should be global."
You'd expect nothing less from the manager of a global-allocation fund. But Stattman has a fine 19-year track record to back up his statements.
This is an outstanding fund but, alas, its Class A shares come with a hefty front-end sales load of 5.25%, plus expenses of slightly more than 1% of assets annually. We don't recommend that you pay that kind of sales fee for any fund. But if you can access Global Allocation free of a load through a financial adviser or another conduit, this fund makes a fine core holding.